Senator Hagan asks SEC and Fed not to Prohibit Active Management of Loan Syndications in Risk Retention Regulations

Senator Kay Hagan (D-NC) requested the SEC and the Fed not to impose a prohibition on actively managing exposure in loan syndications in the final regulations implementing the credit risk retention provisions of the Dodd-Frank Act. In a letter to SEC Chair Mary Jo White and Fed Chair Janet Yellen, Senator Hagan said that such a prohibition would run counter to safe and sound banking practSeices and is at cross-purposes with prudential regulation. Loan syndications are a traditional product that banks use to provide capital to corporations, she noted, while managing their exposure to credit risk. The loans they syndicate are held by a large array of institutional investors, including mutual funds, insurance companies, as well as collateralized loan obligations (CLOs) and are not subject to risk retention under Section 941 of Dodd-Frank, posited the Senator.

Risk retention regulations. Senator Hagan, who is a key member of the Banking Committee, is concerned that the risk retention requirements regarding CLOs, if finalized in their present form, would eliminate the incentive to arrange or manage a CLO, and would significantly damage this important source of financing for American businesses. Many companies that rely on CLOs for financing could be forced to set aside plans for business expansion. The re-proposed regulations retain the original proposal, which would require CLO managers to satisfy the minimum risk retention requirement for each CLO securitization transaction that they manage, despite the fact that CLO managers do not originate the underlying assets and have limited balance sheets with which to retain a 5 percent share of the CLO.

Recognizing the shortcomings of the original proposal, the re-proposal introduces a new option that is intended to avoid significant disruption to the CLO market. Under this re- proposal, arrangers of a loan syndication that includes a "CLO-eligible" tranche would be required to hold a 5 percent share of that tranche until the loan is repaid, matures or defaults, and would be prohibited from selling or hedging such exposure.