The recent EU Parliament’s Committee on Economic and Monetary Affairs proposal to increase the EU risk retention requirement may block US CLO managers from selling funds, according to a recent Reuters’ article.
Issuance of US CLOs is $25.7 billion this year, down 55 percent from the $56.9 billion the same time last year, due in part to the upcoming US risk retention rule that will require managers to hold 5 percent of their fund. According to Reuters, limiting access to European investors may push volume lower, and fewer CLOs will decrease the appetite for the $880 billion US leveraged loan market.
Under the new proposal, US CLOs would not be considered EU risk-retention compliant and US entities would be prohibited from investing in European CLOs, according to James Warbey, Partner at Milbank, Tweed, Hadley & McCloy. “A new proposal would require that only European-regulated institutional investors can invest in EU securitizations, and only European-regulated entities can be considered an originator or sponsor, which may have large implications for the U.S. market.”