By Alan Zibel
A trade group representing buyers and sellers of corporate loans
is challenging new rules aimed at reducing the riskiness of such
lending.
The Loan Syndications and Trading Association said on Monday it
filed a legal challenge to the rules, which require firms managing
or arranging collateralized loan obligations, or CLOs, to retain
some of the loans' risk on their books. The New York-based
association is made up of Wall Street firms that sell corporate
debt, such as Barclays PLC and Goldman Sachs Group Inc. as well as
mutual funds and hedge funds that buy such debt.
The rules, completed by six federal agencies in October, stem
from the 2010 Dodd-Frank financial law. One of the law's provisions
requires companies to retain some of the risk from asset-backed
securities they package and sell to investors.
Regulators provided a wide exemption for mortgage-backed
securities, but imposed stricter standards on collateralized loan
obligations, which are pools of corporate loans packaged together
into investments.
Speaking at the Fed's Oct. 22 meeting, a Fed official, April
Snyder, cited "evidence of widespread deterioration" in standards
for such loans in recent years. The new rules, she said, "would
promote disciplined underwriting" and reduce risks to the financial
system as a whole.
In a CLO, companies with lower credit ratings get a loan from a
group of banks, known as a syndicated loan. Managers of CLOs buy
pieces of these loans, pool them together and sell slices of debt
to investors. CLOs typically offer higher returns than corporate
bonds and other loans.
The trade group filed a lawsuit on Nov. 10 in the U.S. Court of
Appeals for the D.C. Circuit alleging the Securities and Exchange
Commission and Federal Reserve's rules were arbitrary and exceeded
the agencies' authority to impose them.
Over the past year, the industry has been pressing regulators to
avoid harming the nearly $350 billion CLO market with rules that
would require the industry to have some "skin in the game" and
retain some of the loans' risk. The final rules require managers
who put together CLOs for investors to retain a 5% interest in the
loans underlying the securities.
Bram Smith, the trade group's executive director, said in a
statement that the rule completed by regulators "disproportionately
punishes an industry that was not involved in the financial crisis,
suffered practically no losses and currently provides critical
financing to over 1,000 noninvestment grade companies."
The trade group "worked tirelessly to provide the agencies with
workable and practical options because we believe the negative
impact of the risk retention rule on the CLO market and broader
economy will be significant, " he said. "None of our material
proposals were implemented."
A Fed spokesman declined to comment, while an SEC spokeswoman
had no immediate comment.
Write to Alan Zibel at alan.zibel@wsj.com
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