US CLO managers have a problem. If they want to sell their deals to EU investors, they have to submit detailed, loan-level reports to regulators.
The idea is to increase transparency for investors, because European regulators consider CLOs — somewhat counterintuitively — to be private securitizations.
Such granular disclosure templates might make sense to prevent dodgy deals by issuers who securitize a bunch of their own assets to a few investors. But for CLO managers, who sell bonds backed by diverse portfolios of dozens or even hundreds of leveraged loans, it seems disproportionate.
Lawyers have told GlobalCapital that providing the required information is a nuisance for all. But for non-European issuers it is impractical, not to say impossible. In the CLO world, that means US managers. Even worse, investors said the data was often irrelevant to them or incomprehensible.
CLO issuers and investors tend to negotiate contractual arrangements deal by deal. The investors receive the information they want in the format they need, in monthly trustee reports.
Regulators on both sides of the English Channel acknowledge that some of the present disclosure requirements for private securitizations are disproportionate.
The European Securities and Markets Authority is consulting the market on potential changes to disclosure templates for private securitizations.
It proposes four possible courses of action, ranging from doing nothing to a complete overhaul of the reporting regime. The most likely outcome seems to be a move away from loan-level templates and towards transaction-level reporting.
At first, the transition would cost CLO managers a bit of time and money, but in the long run, the simplified templates should reduce the amount of paperwork and lawyers involved.
The consultation ends in March, but any changes could take years.
However, so far, Esma has no obvious plans to take a different route: switching to treat CLOs as public securitizations.
Changing the private-public boundary
Its peers in London are not so sure yet.
While the UK is giving the Financial Conduct Authority and Prudential Regulation Authority more power to implement securitization regulation, it is not clear yet what changes will be made to the reporting regime.
However, both institutions are considering redefining what constitutes a private or public transaction. The FCA has proposed expanding the definition of a public securitization to include deals that the market recognises as publicly distributed and traded.
Both regulators have also suggested simplifying disclosure templates for public and private securitizations.
For many parts of the securitization market, these considerations make sense. But when it comes to CLOs, the FCA and PRA may be better advised to wait and see what Esma does.
If its new definition of public securitizations included CLOs, this would impose a whole new set of disclosure requirements on managers.
If Esma does that, the UK's effort to make reporting more straightforward than it is in the EU could have the exact opposite effect.
One of the promises of Brexit was a chance to do away with EU bureaucracy and create a more flexible, less burdensome capital markets regime.
There are different paths to lightening the load of onerous and meaningless reporting for CLO managers. Some may involve redefining public securitizations, others (probably more) have to do with simplifying templates for private transactions.
But in a market as interconnected as European CLOs, if the UK and EU diverge, issuers will have to comply with the more rigid reporting standards anyway. And if the differences are big enough, the UK could end up creating the bureaucratic burdens it had hoped to exit.
So if the FCA and PRA genuinely want to improve issuers’ lives and happiness, then whatever they think on the issue, they will have to follow Esma’s lead.