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November 2022 | Issue 250

New US CLOs brace for EU’s Article 7 reporting requirements

Michelle D'Souza headshot
Michelle D’souza
Senior reporter
New issue EU-compliant US CLOs will be trickier to assemble after the EU Securitisation report, sources say.
Investors now need Article 7 reporting compliance for new non-EU securitisation investments (such as US CLOs). This includes high-level portfolio reporting to investors, including loan-by-loan data in greater depth than even CLO trustee reports provide.
Creditflux reported in August on the influx of European risk retention-compliant US CLOs, with these deals pricing markedly tight of non-compliant deals. At the time, Nearwater Capital’s Theo Fleishman said that triple A spreads on risk retention US CLOs was about 30 basis points lower than for non-compliant deals, compared to a 10bp historical basis.
Sources say EU-compliant deals marketing now simply include risk factors, rather than explicitly complying with Article 7 reporting, as the market awaits recommendations from the EU Commission on data templates.
Going forward, some managers will find it challenging to fully comply. Chris Duerden, partner at law firm Dechert, says there could be a chilling effect for new issue deals marketed to EU investors until the market finds a “happy place” — particularly for private credit deals.
“There could be a chilling effect on new issue deals”
Chris Duerden, Partner | Dechert
“There’s certain information that those templates ask for that would clearly fall under the confidentiality provisions of underlying credit documents,” says Duerden.
“It’s not just managers worrying about breaching such terms with the obligor, but also from a trade secret perspective. For example, how managers originate from an overall credit profile, what are the leverage attachments or multiples with respect to underlying obligors — aspects they might not necessarily want made public.”
Side letter-type arrangements, with managers agreeing to provide extra information, have existed, but for many CLOs, only under the condition of sole discretion, rather than Article 7 compliance.
Instead of complying with Article 7, US CLOs had previously settled on an interpretation that requires 5% risk retention. There was, however, always some risk of that changing after the finalised report.
Milbank partner John Goldfinch outlined previously that Article 7-compliance is only applicable for new investments, rather than existing US CLO holdings. Secondary CLO purchases, however, are considered new investments and, as such, are in scope.
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Global credit funds & CLO's
November 2022 | Issue 250
Published in London & New York.
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