Despite romantic notions that the American dream is built solely on sweat and determination, the reality is that in addition to hard work, the success of American ingenuity is also contingent on reliable access to affordable credit. Without consistent sources of financing, small and large companies alike would not be able to innovate and grow.
Unfortunately, not all businesses have access to traditional corporate bonds, and that is where collateralized loan obligations, or CLOs, come in. CLOs are a critical resource for many companies, especially small and midcap companies, and regulators would do well to keep this in mind when evaluating new rules that could restrict their availability in the future.
For NCI (NYSE: NCS), CLOs have become a vital part of our operating strategy. We have been a public company since the early 1990s and specialize in manufacturing building products for nonresidential construction industry. Ninety percent of our manufacturing and business happens inside the United States; therefore, the health of our business is highly correlated to changes in the U.S. economy.
We have weathered many challenges over the last two decades including this most recent recession — the worst in 50 years. Like many businesses, we faced dramatic decline in product demand due to the financial crisis. In fact, in 2009 our end markets crashed by 60% and to survive, we were forced to reduce our manufacturing plants by 25% and, unfortunately, our workforce by 40%. However, we were able to secure an equity investment from Clayton, Dubilier & Rice while amending and extending our term loan and working capital facility. These actions allowed us to improve our balance sheet and preserve our company.
CLOs have proven to be a valuable resource for our company because they provide commercial loans at affordable rates and have ultimately increased the availability of debt at a reasonable cost for businesses like ours — American manufacturing companies investing in U.S. economic recovery. Now, four and a half years on, we have been able to grow our business by investing in four new manufacturing plants and acquiring Metl Span, a market leading company in one of the fastest-growing energy-efficient nonresidential building products — insulated metal panels. We now have 37 plants in 19 states and one plant in Mexico. We have added 1,000 jobs since the downturn and regained $1 billion in market cap. Accessing much needed capital through the utilization of CLOs has enabled our recovery and our growth.
Unfortunately, proposed risk retention rules would result in a drastic rise in the cost of financing and a reduction in credit availability for many innovative American companies, both large and small, that are currently contributing to the economic recovery. As written, the risk retention rules will cause most if not all CLOs to abandon the market due to insurmountable and unreasonable requirements on CLO managers.
While it is critical that regulators ensure markets function safely and effectively for all participants, overstepping by creating a one-size-fits-all approach to diverse financial products with real world value does not harm Wall Street, it harms American businesses. These rules would have a chilling effect on job creating businesses like NCI and essentially make it more expensive to run or expand a business of any size. Worse, these changes are completely unnecessary. Over the past 10 years, CLOs have fared better than many investment grade bonds with an impairment rate of less than 1.5%. In fact, CLOs performed better than any other securitization asset class during the financial crisis.
I would urge regulators to think carefully about any rule changes that would impede CLO formation in the future and subsequently put at risk our tenuous but ever-strengthening recovery process. Regulators should instead work with businesses to strengthen the market and ensure companies have the tools needed to continue to push the American economy forward.
Norm Chambers is chairman, president and CEO of NCI Building Systems in Houston.