| NEW YORK
NEW YORK Feb 3 (Reuters LPC) - The US Collateralized Loan
Obligation (CLO) market is attempting to set a standard
timeframe for managers to disclose how much risk they intend to
hold to comply with Dodd-Frank regulation, even as President
Donald Trump pushes ahead with plans to dismantle the law.
Regulators want managers to give fair value determinations
before CLOs are priced to give potential investors enough time
to understand the calculations. A set timeframe could allow CLOs
to be issued more quickly, removing another brake on new
issuance, which has fallen for the last two years and is
expected to drop again in 2017.
Risk-retention rules that require CLO managers to hold 5% of
their deals came into effect in December and prompted more
pessimistic bank forecasts of a 30% drop in CLO issuance in
2017. As CLOs are the biggest buyers of leveraged loans, this
could leave less capital available to fund new leveraged buyouts
or help companies refinance.
Under Dodd-Frank regulation, CLO managers that want to buy a
horizontal retention slice have to show the calculation used to
determine the size of the holding.
Managers can buy 5% of every tranche of a CLO, known as a
vertical strip to comply with US risk-retention rules, or 5% of
the face amount of all of the fund's tranches, which is known as
a horizontal strip, and held in the most junior equity tranche.
Managers can also purchase a combination of vertical and
The exact timing for the disclosure is still being decided,
but managers must describe a range for what fair value is
expected to be in the last preliminary offering document before
pricing, according to Deborah Festa, head of law firm Milbank,
Tweed, Hadley & McCloy's West Coast securitization and
investment management practices. Managers then have to disclose
precise fair value when the CLO closes.
"There is a lot of negotiation happening now and the market
will settle on norms and methods of disclosure and timing,"
Managers that choose horizontal strips are required to
disclose the fair value of the entire capital structure and the
fair value of the retained interest to investors, Festa said,
and will also need to include a description of what fair value
is and the methodology used in a fund's offering documents.
As fair value is determined using assumptions and there are
significant unknowns before pricing, managers are allowed to
give investors a range rather than the specific determination,
according to William Fellows, a partner in Deloitte & Touche's
valuation and modeling practice.
When CLOs close, fair value is calculated for every tranche
to ensure that collateral managers keep equity equal to at least
5% of the entire deal, according to Cindy Ma, global head of the
portfolio valuation and fund advisory service practice at
Apex Credit Partners, a unit of Jefferies Finance, which
priced its US$453.85m JFIN 2017-1 CLO with Jefferies last month,
said that the manager will buy a horizontal retention slice,
CIFC, which manages about US$13.7bn in assets, is also
planning to retain a horizontal strip to comply with US
risk-retention rules in a CLO it is raising with Deutsche Bank,
according to sources.
(Reporting by Kristen Haunss; Editing by Tessa Walsh and