Legislative and Regulatory Considerations in the Leveraged Loan and CLO Markets: Are They Still Safe?

Abstract

In February 2018 the LSTA prevailed in its long legal battle with federal regulators when the DC Circuit Court ruled that CLO managers were not subject to risk retention. With the favorable resolution of that key issue and in light of the hands-off approach to financial regulation, it appeared that the CLO market would be able to continue doing business at historic levels for years to come. However, recent pressures from three different directions are calling that assumption into question. A lawsuit contending that loans are subject to the disclosure and anti-fraud provisions of the securities laws, new capital rules on CLOs published by Japanese regulators, and recent legislation relating to leveraged loans and CLOs introduced in both the House of Representatives and the Senate may change the benign landscape. This article examines the new threats and explains how each could upend the loan and CLO markets. TOPICS: CLOs, CDOs, and other structured credit; legal and regulatory issues for structured finance Key Findings • The leveraged loan and CLO markets successfully navigated regulatory challenges imposed by Dodd–Frank. • CLO issuance has reached record levels in the past few years, operating in a more benign regulatory environment. • Challenges from US and Japanese regulators and a lawsuit that could change the legal status of loans threaten to upend the loan and CLO markets.