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BDCs can hold risk without violating Dodd-Frank rules, SEC says

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NEW YORK (LPC) - The Securities and Exchange Commission (SEC) has said that Business Development Companies (BDCs) will be able to hold a portion of a Collateralized Loan Obligation (CLO) without violating rules governing closed-end funds.

BDCs, which typically lend to privately-owned US mid-sized companies, previously used CLOs as a financing mechanism, often a cheaper option than raising a loan. But risk-retention rules that took effect in December 2016 threw that method into question as regulations governing these funds prohibit advisers from selling securities to the BDC.

The decision, offered September 7 in the form of a no-action letter in response to law firm Dechert on behalf of Golub Capital, opens the door for an increase in issuance by seamlessly allowing managers to transition loans from their BDC into a CLO and passing the retention though the adviser and back into the BDC.

“This is a major development,” said Deborah Festa, head of law firm Milbank, Tweed, Hadley & McCloy’s West Coast securitization and investment management practices. “The results should be a significant increase in middle market CLO activity by BDCs that are able to originate all of the loans acquired by their CLOs.”

Last year, LPC reported that participants in the US$560bn US CLO market had reached out to the SEC for guidance on the issue.

David Golub, chief executive officer of Golub Capital BDC, and an SEC spokesperson both declined to comment.

CLO RETENTION LAWSUIT

Dodd-Frank, a sweeping package of rules signed into law in 2010 in response to the credit crisis, includes risk-retention rules that force managers to hold 5% of their funds.

The US loan trade association, the Loan Syndications and Trading Association (LSTA), won a lawsuit against the Federal Reserve and SEC arguing the risk-retention rules were not applicable because managers of CLOs that own broadly syndicated loans do not transfer assets.

Regulators did not appeal the decision.

Broadly syndicated CLOs sell tranches of varying risk to investors backed by a pool of loans made to large US companies, including American Airlines and retailer Party City.

Reporting by Kristen Haunss; Editing by Michelle Sierra and Jon Methven

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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