A fixed income buyside analyst said that a number of issuers he had spoken to were now planning to hold off on issuing new deals in the early part of next year, holding onto the hope that the new administration will modify or repeal risk retention.
“We knew January was going to be slow anyway,” he said. “But the political uncertainty surrounding a Trump administration and its opposition to Dodd-Frank makes it worse.”
“Before Trump won, you knew what you had to do and it was just about raising the capital. But now, why would you go out and do a compliant deal with the possibility of risk retention being repealed.”
However, given the climate of uncertainty around the incoming administration, other market observers say that waiting for risk retention to be scrapped is not a viable long-term strategy.
“We certainly aren’t having those conversations,” a CLO manager said. “Even if it were rolled back, it’s also difficult to sell it to investors, given how good risk retention is for them. Large triple-A investors aren’t just going to say to managers that they no longer have to retain risk just because it’s now legal not to do so.”
A CLO lawyer echoed this point.
“I have discussions with managers who now want to plan next year’s business around politicians and I try to persuade them that it isn’t a sound strategy,” said a CLO lawyer.
Both the CLO lawyer and the analyst added that they view the Trump administration as an unknown, and that the specific issue of risk retention relief is probably not a priority in the near-term. The lawyer also noted that it could be the case that managers hoping for relief do not yet have compliant structures in place.
“Anyone who is planning their business around Washington at the moment is doing it because they haven’t raised capital and now they are using political cover to justify why they aren’t doing deals,” the lawyer added.
Even before Trump’s win, there had been a strong call from Republicans in Congress to roll back or completely repeal Dodd-Frank. The movement is led primarily by Republican Jeb Hensarling (R-Texas), the chairman of the House Financial Services Committee.
Alongside Hensarling, Dodd-Frank opponents will probably have another powerful ally in Washington in Treasury secretary nominee Steve Mnuchin, who used his first interview since being tipped as Trump’s pick to target the landmark financial regulation.
In an interview with CNBC, Mnuchin stated that Dodd-Frank was “way too complicated” and that it cut back on bank lending and hindered small businesses. He also stated that it would be a priority of the new administration to make lending easier again. In this regard, CLOs could be a major beneficiary of Republican rule in Washington.
The options ahead centre around either marginal changes to Dodd-Frank, such as risk retention modifications or exemptions for CLOs, or a complete repeal of the bill.
A Dodd-Frank alternative, Hensarling’s Financial CHOICE Act, passed through committee in September. Among other things, the bill would remove the risk retention requirement for CLOs and other non-mortgage assets, gutting the “skin in the game” tenet that was at the core of Dodd-Frank.
However, sources in Washington, DC, speaking to GlobalCapital say that there is not much of a belief among Republicans or Democrats that such a measure would pass Congress.
Although Hensarling could almost certainly pass a bill through the House, there is enough Democratic opposition in the Senate to make such a proposal a non-starter, given that 60 votes are needed to stop a filibuster. The Democrats hold 48 seats in the 100-seat chamber. Given that Democrats remain united in opposing the repeal of post-crisis financial regulation, it is possible that the CHOICE Act would never reach Trump’s desk.
However, the word among policy observers in the capital is that some Senate Democrats would be willing to make reasonable changes to Dodd-Frank, which could include something akin to the qualified CLO (QCLO) rule that would exempt some CLOs from risk retention.
The QCLO exemption, which has been championed by the Loan Syndications & Trading Association, the main CLO industry group, would essentially mean a manager could retain 5% of the CLO equity tranche rather than 5% of the total deal, reducing the capital burden required to issue.
While a standalone measure is unlikely to be high up on the Republican agenda, it could feasibly be wrapped into a wider package of Dodd-Frank reform that would include exemptions for other asset classes, such as CMBS. However, the broad view is that it would be unwise to bet the house on Dodd-Frank reform in 2017.