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August 2022 | Issue 248

Euro risk retention becomes must-have feature for US CLOs

Sayed Kadiri headshot
Sayed Kadiri
Tanvi Gupta headshot
Tanvi Gupta
Head of data journalism
For the past four years, risk retention-compliant US CLOs have been viewed as a luxury. But today issuers see a clear advantage to putting skin in the game.
“It is not clearly defined, but historically we estimated a 5-10 basis point saving on a CLO’s weighted cost of capital if it complies with European risk retention rules,” says Theo Fleishman, managing director at risk retention financier Nearwater Capital. “However, over the past few weeks, the range has drifted to roughly 30bp on triple As alone, which were pricing anywhere from the high 100s to low 200s in the same week.”
Fleishman, who headed structured credit syndication at Natixis before joining Nearwater just over a year ago, says the old breed of EU risk retention compliant CLOs priced their senior debt 2-3bp tight of where they otherwise would. The savings in the mezzanine and junior tranches could be 20-25bp, which brought the blended saving to 5-10bp.
The cheaper funding of EU risk retention compliant US CLOs is due to the broad range of investors these transactions reach. Compliant deals have tended to be five-year transactions and, notably, these have priced tighter than three-year CLOs, which are often print and sprints.
“The saving has drifted to roughly 30bp on triple As alone”
Theo Fleishman, Managing director | Nearwater Capital
AGL Credit Management, which launched its first CLO in late 2019, has made all but one of its US CLOs EU risk retention compliant. The firm hired Bank of America’s primary CLO head Wynne Comer earlier that year, and she says, given her experience on the sell side, it was important to her that AGL produced EU-compliant US CLOs to appeal to a global investor base.
“Having the ability to consistently issue EU risk retention compliant transactions is a real differentiator to the AGL brand, especially in volatile markets,” says Comer. “Not only is it a requirement for many of our European and Asian investors, but it also provides for transparency around alignment of interest.”
According to a New York-based CLO investor, the appeal of risk retention compliant CLOs is so strong it will not just impact pricing levels. In today’s market it can determine whether a deal goes ahead. “That 5% retention could be the difference between a CLO pricing and not.”
The investor says tight pricing on the mezz of EU-compliant CLOs should not be overlooked, with several fund managers having launched CLO funds that can only buy risk retention bonds.
Even if a compliant US CLO does not bring in risk retention-bound investors in primary, it should still see long-term benefits in greater secondary liquidity, says Fleishman.
Nearwater specialises in risk retention financing for CLOs and other structured credit asset classes. New York-based Fleishman says he is fielding increased inquiries for risk retention compliant deals.
Since US risk retention rules were repealed in 2018, about 30% of US CLOs have complied with European retention rules.
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Global credit funds & CLO's
August 2022 | Issue 248
Published in London & New York.
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