November 9, 2021 - by Elliot Ganz. As we noted recently, Senator Elizabeth Warren introduced legislation, the “Stop Wall Street Looting Act of 2021” ( the “SWSLA”) that primarily targets the private equity market. However, the SWSLA also includes a provision that would re-impose risk retention on managers of CLOs and changes to the bankruptcy code that would negatively impact secured creditors. The legislative text of the SWSLA is available here and an executive summary is available here.
Today, RealClearMarkets published an op-ed by LSTA General Counsel Elliot Ganz that explains that risk retention for CLO managers is a “solution in search of a non-existent problem”. The op-ed is available here.
The op-ed makes several important points. First, the original statutory rationale for imposing risk retention was to require managers of “originate-to-distribute” securitizations to have “skin in the game” While this may work for OTD securitizations, it assuredly does not make sense for CLOs where managers do not originate loans but, instead, purchase them in the open market. Indeed, the Court of Appeals panel that ruled on statutory grounds that that risk retention does not apply to CLO managers agreed that CLOs already achieve the policy goals sought by Congress through the incentives and transparency built into their structure.
Second, the Court’s view has been affirmed by federal regulators and independent auditors and validated by decades of experience. CLOs have performed extremely well for over 30 years, including through the 2008 financial crisis and the Covid-19 pandemic and investors in CLOs have experienced barely any losses at all. Moreover, federal regulators and the Government Accounting Office (GAO) have all concluded that neither syndicated loans nor CLOs are systemically risky.
At bottom, CLOs have performed very well, do not impose systemic risk, and their interests are already aligned with those of their investors. Reimposing the risk retention mandate, as SWSLA proposes, would be a costly mistake. The LSTA will continue to closely monitor this legislation and other bills that have been introduced in Congress that could materially impact CLOs and the syndicated loan market.
