Recent Trends in Raising Captive Equity for Broadly Syndicated CLOs

Abstract

The Loan Syndications and Trading Association victory over federal regulators released managers of open market collateralized loan obligation (CLO) transactions from the requirement to comply with the US risk retention rules. This removed one of the most substantial economic hurdles to managing CLOs sold to investors in the United States and Asia. In their quest for a broader investor base, however, CLO managers are more frequently looking to Europe. At the same time, CLO managers continue to raise capital to fund the equity that supports their CLOs. Because CLOs sold to European institutional investors need to comply with the EU Securitisation Regulation, several important factors must be considered when structuring investment vehicles used by CLO managers to fund their CLO equity. This article examines some of the key legal, tax, and regulatory issues that CLO managers face when raising capital that will be used to fund the equity in EU-compliant CLOs. TOPICS: CLOs, CDOs, and other structured credit; project finance; legal and regulatory issues for structured finance; financial crises and financial market history; manager selection Key Findings • US CLO managers are increasingly looking to issue CLOs that may be sold to certain types of regulated European investors. At the same time, they continue to raise capital to fund the equity in their CLOs. • There have been several recent developments affecting the manner in which CLO managers are able to raise captive equity. These include, among others, the elimination of the US risk retention rules for “open market CLOs” and the adoption of the European Securitisation Regulation, which provides some clarity around some of the regulatory considerations related to investment vehicles through which such capital is deployed. • When structuring these investment vehicles, US CLO managers should be aware of the current state of the market on a variety of legal, regulatory, and tax issues.