CLO managers have long lobbied against proposed rules requiring them to keep "skin in the game" of these deals, arguing that such a requirement would increase the cost of financing for U.S. companies.
Now they can say exactly how much more this financing would cost.
The Loan Syndication and Trading Association, a trade group, has commissioned a study by consulting firm Oliver Wyman showing that, as proposed, risk retention rules would likely reduce CLO formation by $170 billion to $250 billion.
Companies seeking to replace this source of financing would be forced to rely on more expensive sources of credit. To replace CLOs, borrowers would likely see financing margins increase by more than one-third, an increase in annual interest costs equivalent to $3.2 billion in today's market.
"CLOs are an integral source of financing for U.S. companies and provide real economic value to investors," Bram Smith, the LSTA's executive director, said in a press release issued today. "As proposed, risk retention will impede the availability of CLOs which will severely limit the availability of credit for American companies and force corporate borrowers to rely on more expensive sources of funding - if the other funding is available at all."
CLOs provide $280 billion of credit to non-investment grade corporate borrowers. That's roughly 45% of non-investment grade term loans to U.S. companies. Other investors include mutual funds, hedge funds and other private investment funds.