CLOs in the Heartland April 26, 2016 Opening Remarks Jill Zelter, - - PowerPoint PPT Presentation

CLOs in the Heartland

April 26, 2016

Opening Remarks

Jill Zelter, Managing Director, Fitch Ratings

State of the Capital Markets:

First Quarter 2016 Review and Second Quarter 2016 Outlook

Randy Schwimmer

Senior Managing Director Head of Origination & Capital Markets Churchill Asset Management T (212) 478-9203 M (646) 584-1362 randy.schwimmer@churchillam.com

April 26, 2016

• US public markets recovered from 4Q lows; dovish Fed eases investor worries about

inflation; China, commodities, and energy take back seat

• HY issuance has modest comeback as fund flows reverse; bond volume at $35.5B,

flat to last quarter, but off sharply from $91.6B for 1Q 2015

• $41B of US leveraged loans was 18.6% off previous quarter ($50.4B) – worst

Capital Markets Review – First Quarter 2016

Volatility eases as market conditions stabilize

• $41B of US leveraged loans was 18.6% off previous quarter ($50.4B) – worst

quarterly performance since 2011; retail loan funds broke a 32-week streak of

• utflows in March; YTD still negative at $4.9B
• Middle market sponsored volume of $6B (est.) is lowest in six years
• Risk retention worries and below-hurdle equity returns grind new CLO formation to

near-standstill of $7.1B (vs $25.3 for 1Q 2015)

CLOs in the Heartland 4

Sources: S&P Capital IQ, Thomson Reuters LPC

• Low-rate, low-growth environment remains challenging for PE returns; purchase

price multiples close to record highs

• 1Q saw advantage swing to the buy-side as spreads remained wide
• Private credit funds continue to fundraise and invest; regulated banks retreat from

highly leveraged transactions

Capital Markets Review – First Quarter 2016

What’s the setting for debt and equity INVESTORS? highly leveraged transactions

• Chase for yield winning out over liquidity or credit concerns; institutional investors

have swung back to higher risk alternatives

• With BDCs cash-constrained, second lien has been disintermediated by mezzanine;

unitranche and senior stretch taking larger structure shares

CLOs in the Heartland 5

• Known large cap borrowers getting good terms in broadly syndicated market; story

credits still struggling amid constrained market liquidity

• Larger middle market arrangers with higher holds offering “club execution”

alternative to syndication for increasingly bigger deals (“cargo pants” strategy”)

• Sponsors getting one-stop shop solutions from private credit providers; unitranche

Capital Markets Review – First Quarter 2016

How about debt and equity ISSUERS?

• Sponsors getting one-stop shop solutions from private credit providers; unitranche

financings providing certainty of execution

• Borrowers and sponsors seeking flexibility at a price; covenants, debt baskets, and

structures all continue to be issuer-friendly

CLOs in the Heartland 6

Capital Markets – Behind the Scenes

CLOs remain a significant share of the institutional market

2.3% 6.8% 11.0% 21.1%

Institutional investor market share

CLOs in the Heartland 7 58.8%

Finance Co. Insurance Co. Hedge, Distressed & High-Yield Funds Loan Mutual Funds CLO

Institutional investor market share Source: S&P LCD, Capital IQ

Capital Markets – Behind the Scenes

With deal flow down, banks’ share of loans has rebounded

70% 80% 90% 100%

Primary market for highly leveraged loans (banks vs. non-banks)

CLOs in the Heartland 8 0% 10% 20% 30% 40% 50% 60% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q16

Institutional investors and finance companies Banks & securities firms Institutional investor market share Source: Wells Fargo, S&P LCD Capital IQ

Capital Markets – Behind the Scenes

Correlation between asset classes has grown since the credit crisis

70% 80% 90% 100%

Loans vs High Yield Loans vs Equity

Correlation between asset classes

CLOs in the Heartland 9 0% 10% 20% 30% 40% 50% 60%

Shows cumulative correlation between indicated asset classes Source: LSTA, S&P LCD

Capital Markets – Behind the Scenes

PE fundraising remains healthy, as expected…

61 74 69 63 66 92 77 90 105 05 89 77 71 75 71 81 70 71 80 100 120

$50 $60 $70 $80 $90

CLOs in the Heartland 10 $36 $34 $25 $20 $35 $36 $27 $36 $37 $82 $35 $77 $54 $60 $41 $59 $46 $36 $45 $65 $57 61 52 45 63 49 61 66 20 40 60

$0 $10 $20 $30 $40 $50 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2011 2012 2013 2014 2015 2016

Capital Rais ised ($B) # of Fund unds Clos

• sed

Source: PitchBook; data for North America

Capital Markets – Behind the Scenes

…while deal flow declines for third consecutive quarter

813 13 760 60 745 45 829 857 57 785 85 767 67 1,117 814 763 63 908 985 85 1,070 956 56 1,0671,060 1,02 028 1,03 030 1,02 024 957 800 1,000 1,200

$150 $200 $250

CLOs in the Heartland 11 $108 $113 $101 $126 $93 $99 $104 $194 $106 $125 $149 $183 $159 $162 $172 $174 $160 $155 $198 $147 $141 745 45 695 200 400 600

$0 $50 $100 $150 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2011 2012 2013 2014 2015 2016

Capital Inve vested ($B) # of Deal als Source: PitchBook; data for North America

Capital Markets – Behind the Scenes

Sense of market stability causes investors to reverse out-flows

0.51 0.39 0.25 0.17

$0B $1B $2B

Prime-fund flows (weekly reports only)

CLOs in the Heartland 12

• 1.19
• 1.17
• 3.46
• 1.53
• 0.75
• 2.12
• 4.66
• 2.49
• 2.54
• $5B
• $4B
• $3B
• $2B
• $1B

Mar 2015 Apr 2015 May 2015 Jun 2015 Jul 2015 Aug 2015 Sep 2015 Oct 2015 Nov 2015 Dec 2015 Jan 2016 Feb 2016 Mar 2016

Source: S&P/LCD

Capital Markets – Behind the Scenes

New CLO formation building slowly; lowest volume in four years

13.39 16.24 12.74

$14B $16B $18B

Monthly CLO Volume

CLOs in the Heartland 13

11.30 7.73 11.16 11.29 8.26 5.15 9.38 10.18 5.66 7.35 6.02 5.57 7.33 4.81 7.46 0.83 2.07 4.20

$0B $2B $4B $6B $8B $10B $12B Jul 2014 Sep 2014 Nov 2014 Jan 2015 Mar 2015 May 2015 Jul 2015 Sep 2015 Nov 2015 Jan 2016 Mar 2016

Source: S&P/LCD

Capital Markets – Behind the Scenes

Financing activity with sponsors slumps amid uncertainty

20.0 25.0 30.0

($B.) Sponsored Sponsored Middle Market Volume

CLOs in the Heartland 14

0.0 5.0 10.0 15.0

1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 4Q15

Issuance ($B

Source: Thomson Reuters LPC

Capital Markets – Behind the Scenes

LBO leverage is down, thanks to Leveraged Lending Guidance

6.0x 6.5x 7.0x 7.5x EBITDA (x) Institutional MM Large Corp. 40% 45% 50% 55% ibutions Institutional MM Large Corp.

CLOs in the Heartland 15

Source: Thomson Reuters LPC

3.0x 3.5x 4.0x 4.5x 5.0x 5.5x 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q16 LBO Debt to EB 20% 25% 30% 35% 40% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q16 Equity Contribu

Capital Markets – Behind the Scenes

Supply/demand dynamics continue favoring investors

6.0% 7.0% 8.0% 9.0% 10.0% 2.0 4.0 6.0 8.0 10.0 (3 years) ws ($B)

CLOs in the Heartland 16

Source: Thomson Reuters LPC

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%

• 10.0
• 8.0
• 6.0
• 4.0
• 2.0

0.0 2.0 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 Single B-yields (3 Loan fund flows

Loan fund flows Single- B loan yields

Capital Markets – Behind the Scenes

Better credits get better pricing; liquidity challenged regardless

5.5% 6.0% 6.5% 7.0%

BB B

New-issue yield to maturity for leveraged loans

CLOs in the Heartland 17

Source: S&P LCD

2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

Capital Markets – Behind the Scenes

Middle market illiquidity premium remains around 75 bps

L+500 L+600 L+700

CLOs in the Heartland 18

Source: S&P LCD; institutional spreads, sponsored transactions; LC = >$50mm ebitda, MM = <$50mm ebitda

L+0 L+100 L+200 L+300 L+400

Large Cap Middle Market

Capital Markets – Behind the Scenes

Middle market leveraged loan yields up fourth straight quarter

7% 8% 9% 10% 11% 12%

3-year)

LIB/LIB Floor LIB Spread Spread due to OID CLOs in the Heartland 19

Source: Thomson Reuters LPC; all-in middle market institutional yields (3 year)

0% 1% 2% 3% 4% 5% 6% 7% 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 2008 1Q-3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

All-in-yield (3

Capital Markets – Behind the Scenes

Structural terms remain seller-friendly, despite lower volume

US Covenant-Lite Loans (by purpose)

50.0 60.0 70.0 $Bils.) M&A/LBO

• Div. Recap.

Refi & All

$200B $225B $250B $275B 70% 80% 90% 100%

Volume Percent

US Covenant-Lite Loans

CLOs in the Heartland 20 0.0 10.0 20.0 30.0 40.0

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16

Cov-lite volume ($B Refi & All Other

$0B $25B $50B $75B $100B $125B $150B $175B 0% 10% 20% 30% 40% 50% 60% 200420052006200720082009201020112012201320142015 1Q15 1Q16

Source: S&P LCD & Thomson Reuters LPC

Capital Markets – Behind the Scenes

Energy and commodities push default rate to five-year high

6% 7% 8% 9%

Lagging 12-mo leveraged loan default rate by number Composition of defaults (LTM thru March 2016)

Metals & Mining Oil & Gas CLOs in the Heartland 21

0% 1% 2% 3% 4% 5% 6%

Dec 2002 Dec 2003 Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015

0% 10% 20% 30% 40% 50% Retailers (exc Food & Drug) Electronics/Electric Services & Leasing Forest Products Healthcare

Source: S&P LCD

Capital Markets – Second Quarter 2016 Outlook

Supply/demand balance creating “Goldilocks” effect

• Deal flow will pick up modestly as sponsors work to put “dry powder” to work
• Technicals in broadly syndicated market will continue to favor investors, though

needle likely to swing further sell-side later in second quarter

• Middle market conditions will be constructive for both issuers and investors;

increased direct lender demand balanced by weak CLO and bank appetite

CLOs in the Heartland 22

increased direct lender demand balanced by weak CLO and bank appetite

• Unitranche remains hot product; more direct lending capacity coming from new

firms; smaller managers merging or bulking up with JV’s and partnerships

• All-in first-lien loan yields ease to <6% for BSL’s; mid caps remain in 6-7% range
• Senior leverage of 3.5-4x; total of 5-5.5x for traditional middle market; 4.0-4.5x

senior/5.5-6.0x total for larger mid caps; >4.5x senior/6.0x total for BSL

QUESTIONS

23 CLOs in the Heartland

State of Middle Market Lending and BDCs

State of Middle Market Lending and BDCs Moderator: Mike Simonton, Managing Director, Fitch Ratings Panelists: Tom Bax, Treasurer, NXT Capital Frederick C. Fisher, Partner, Mayer Brown Frederick C. Fisher, Partner, Mayer Brown Brad Hamner, Senior Vice President, Antares Capital Meghan Neenan, Senior Director, Fitch Ratings Michael Paladino, Managing Director, Fitch Ratings Jerry Stahlecker, Executive President, Franklin Square

CLOs in the Heartland 25

Regulatory and Accounting Update

• J. Paul Forrester

Partner 312.701.7366

jforrester@mayerbrown.com

April 26, 2016

Sagi Tamir

Partner 212.506.2583

stamir@mayerbrown.com

Volcker Rule – Legacy CLOs

• The Volcker rule prohibits banking entities from making or

maintaining investments in “covered funds”

• CLOs are generally covered funds since they rely on

Section 3(c)(7) for an exemption from the Investment Company Act Company Act

• Since the adoption of the Volcker rule, the CLO market

generally has been using the “loan securitization” exclusion under the Volcker rule and has been “Volckerizing” many legacy CLOs to become eligible therefor

CLOs in the Heartland 27

Volcker Rule – Legacy CLOs (Con’t)

• However, some legacy CLOs have not yet been “Volckerized”

and prior expectations that they would have been refinanced are being challenged by current market conditions

• Acknowledging that banks have been important investors in

CLOs, the Federal Reserve Board (FRB) has extended the conformance period for banks that invest in CLOs until July conformance period for banks that invest in CLOs until July 2016 and stated that the FRB intended, if banks were making good faith efforts for conformance, to grant one additional extension until July 2017 and that they would do so in 2015. So far, the FRB has not extended such conformance period

CLOs in the Heartland 28

Quick Risk Retention Primer

• Compliance already required for all new RMBS deals; compliance for

all other deals beginning December 24, 2016

• Sponsor of a securitization transaction generally must retain at least

5% of fair value as of the closing date of all “ABS Interests” in the transaction

• Forms of Risk Retention:
• Forms of Risk Retention:

– Eligible vertical interest

• Can be either:

– A single vertical security or – An interest in each class of ABS Interests issued as part of the securitization transaction

– Eligible horizontal residual interest (or reserve account) or – Any combination of the above – Special rules for specific types of deals

CLOs in the Heartland 29

Credit Risk Retention for CLOs

• For CLOs

– Collateral Manager is “sponsor” and required to retain – Lead Arranger exemption is not practical – Issue is therefore how to optimally capitalize retention – 4 possible basic approaches:

• Direct Capitalization
• Capitalized Manager Vehicle (CMV)
• Majority-Owned Affiliate (MOA)
• Capitalized-MOA (C-MOA)

CLOs in the Heartland 30

CLO Industry Reactions

• Why us?

– Not originate-to-distribute – CLO manager acts as agent for CLO – Collateral acquired in secondary transactions

• Regulators confused and over-reached

– LSTA sued in November 2014 in DC Court of Appeals claiming that:

• CLO managers are not “securitizers” and cannot be subjected to risk retention
• The federal agencies misconstrued the meaning of “credit risk” by requiring a horizontal equity

slice equal to 5% of the fair value

• The federal agencies acted arbitrarily by failing to consider less costly alternatives proposed by

commenters

– Hearing on February 5 (audio: https://www.cadc.uscourts.gov/recordings/recordings.nsf/)

CLOs in the Heartland 31

CLO Legislative and Lobbying Efforts

• “Qualified CLO” bill

– Builds on LSTA comment letter to CRR re-proposal – Passed (as H.R.4166) with bipartisan support out of HFSC in February 2016 – Requires:

• Asset quality
• Asset quality
• Asset portfolio diversification
• Alignment of manager and investor interests
• Manager must be a registered investment adviser
• Transparency and reporting for investors

CLOs in the Heartland 32

Risk Retention Solutions in the CLO Market

• Direct capitalization – CLO Manager obtains capital from a related entity

(e.g., its parent) to finance its purchase of risk retention securities and continues to provide management services to CLO

• Capitalized manager vehicle (CMV) – CLO Manager raises capital from 3rd

party investors through CLO Manager-created CMV to finance its purchase

• f risk retention securities. Instead of CLO Manager being the asset

manager, CMV is the primary asset manager. CMV then hires CLO Manager manager, CMV is the primary asset manager. CMV then hires CLO Manager as sub-advisor. Key accounting consideration is making sure CMV is NOT consolidated by CLO Manager

• Majority-owned affiliate (MOA) – CLO Manager raises capital from 3rd

party investors through CLO Manager-created MOA to finance the purchase

• f risk retention securities. Key accounting consideration is that MOA

MUST BE consolidated by the CLO Manager

CLOs in the Heartland 33

Example – Capitalized Manager Vehicle

CMV 3rd Party CLO Manager 3rd Party Investor(s)

Economic interest Economic interest Sub-advisory

CLOs in the Heartland 34

CLO CMV (Sponsor) 3 Party Investor(s)

Asset management agreement Risk retention interest Economic interest Sub-advisory agreement

Example - Majority-Owned Affiliate

CLO Manager 3rd Party Investor(s)

Controlling financial interest Economic interest

CLOs in the Heartland 35

CLO MOA (Sponsor) 3rd Party Investor(s)

Risk retention interest Economic interest Asset management agreement

Example – Capitalized Majority-Owned Affiliate

MOA 3rd Party CLO Manager 3

rd Party

Investor (s)

Economic interest Economic interest Sub-advisory

CLOs in the Heartland 36

CLO MOA (Sponsor ) 3 Party Investor (s)

Asset management agreement Risk retention interest Economic interest Sub-advisory agreement

Risk Retention: Fair Value Requirements

• Sponsor of a securitization transaction generally must

retain at least 5% of fair value as of the closing date of all “ABS Interests” in the transaction

– Fair value determination is not required for vertical risk retention or the seller’s interest option for revolving pool securitizations securitizations – Fair value required to be determined using a fair value measurement framework under U.S. GAAP

37 CLOs in the Heartland

Risk Retention: Pre-pricing Disclosure of Fair Value

• Sponsor must disclose to potential investors a reasonable

period of time prior to sale:

– The fair value of the EHRI that the sponsor expects to retain at closing (expressed as a percentage of the fair value of all ABS interests issued in the securitization and dollar amount) – If the specific prices, sizes or rates of interest of each tranche of – If the specific prices, sizes or rates of interest of each tranche of ABS are not known, the sponsor may disclose a range of expected fair values based on a range of bona fide estimates or specified prices, sizes or rates of interest

• If disclosing a range of fair values, sponsor must disclose the

method by which it determined any range of prices, tranche sizes

• r rates of interest

38 CLOs in the Heartland

Risk Retention: Pre-pricing Disclosure of Fair Value

• Description of the valuation methodology and all key

inputs and assumptions or a “comprehensive description”

• f such key inputs and assumptions, including (but not

limited to):

– Discount rates and the basis of forward interest rates used – Loss given default; default rates and lag time between loss and – Loss given default; default rates and lag time between loss and recovery – Prepayment rates – If description includes a curve(s), a description of the methodology used to derive the curve(s) – Summary description of reference data set or other historical information used to develop key inputs and assumptions

39 CLOs in the Heartland

Risk Retention: Post-Closing Disclosure of Fair Value

• A reasonable period of time after closing, sponsor must

disclose fair value using actual sale prices and final tranche sizes

– To the extent the valuation methodology or any key inputs

• r assumptions that were used to calculate fair value prior

to sale differ from the methodology or key inputs and to sale differ from the methodology or key inputs and assumptions used to determine fair value at closing, a description of those material differences

40 CLOs in the Heartland

Fair Value Measurement Framework

• ASC Topic 820 defines fair value as:

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. date.

CLOs in the Heartland 41

Fair Value Measurement Framework

• Additional key concepts around “fair value”:

– Exit price – Principal / most advantageous market – Market participants – Orderly / active market – Orderly / active market – Measurement date – Valuation techniques – Fair value hierarchy

CLOs in the Heartland 42

Fair Value Measurement Framework

• Market Approach

– A valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business.

• Cost Approach

– A valuation technique that reflects the amount that would be required – A valuation technique that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).

• Income Approach

– Valuation techniques that convert future amounts (for example, cash flows or income and expenses) to a single current (that is, discounted)

• amount. The fair value measurement is determined on the basis of the

value indicated by current market expectations about those future amounts.

43 CLOs in the Heartland

Fair Value Measurement Framework Fair Value Hierarchy

• Level 1

– Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

• Level 2

– Inputs other than quoted prices included within Level 1 that are – Inputs other than quoted prices included within Level 1 that are

• bservable for the asset or liability, either directly or indirectly.
• Level 3

– Level 3 inputs are unobservable inputs for the asset or liability.

44 CLOs in the Heartland

Accounting Advice Options

• Why engage accountants for advice on application of

consolidation or fair value guidance?

– There are several sections of the risk retention rules that reference generally accepted accounting principles (GAAP). The two most significant references are:

• In section _.2 the term majority-owned affiliate (MOA) is defined as

“…an entity (other than the issuing entity) that, directly or indirectly, majority controls, is majority controlled by or is under common majority control with, such person. For purposes of this definition, majority control means ownership of more than 50 percent of the equity of an entity, or

• wnership of any other controlling financial interest in the entity, as

determined under GAAP.”

• In section _.4(a)(2) the required 5% eligible horizontal residual interest is

determined by reference to “a fair value measurement framework under GAAP”.

CLOs in the Heartland 45

Accounting Advice Options

• Why engage accountants for advice on application of

consolidation or fair value guidance? (cont’d)

– To make a determination that a structure is compliant with the risk retention rules, a manager may wish to engage accountants to provide advice on GAAP. – Lawyers may also be engaged to issue an opinion on whether the securitization structure complies with the risk retention rules. To issue securitization structure complies with the risk retention rules. To issue such an opinion, they may need a certain level of comfort from accountants on those aspects of the rules that reference GAAP.

CLOs in the Heartland 46

Accounting Advice Options

• What type of accounting advice may be obtained for
• wnership of a “controlling financial interest” in the MOA?

(cont’d)

– Engaging a third party accountant:

• If the manager has no auditor (or the audit is of the managed funds only),

engaging a third party accountant is an option. – In these cases, a third party accounting firm may be engaged to issue a “report on the application of accounting principles,” which analyzes whether a controlling financial interest is owned by the manager.

• Also note that some audit firms may not be willing to issue the separate letter

by the engagement partner described above; this may also prompt engaging a third party accountant.

CLOs in the Heartland 47

Risk Retention and Legal Assurance

• Third party legal opinions are problematic to deliver

– Difficult to make a determination as to how the highest court in a jurisdiction would interpret the rules

• No judicial decisions, very little regulatory guidance and many interpretive issues

remain

• Lack of customary practice; no common understanding of language used in
• pinions or customary expectations regarding diligence
• pinions or customary expectations regarding diligence

– Analysis relies on facts and, in some cases judgments on GAAP (fair value and controlling financial interests)

• Compliance burden is on sponsor; no obligation on

counterparties to comply with risk retention rules

CLOs in the Heartland 48

Risk Retention and Legal Assurance

• Emerging consensus of ABA Task Force

– “no violation of law” opinion not appropriate to give, even a reasoned opinion – negative assurance re disclosures should be appropriate and feasible

• Nothing has come to the attention of counsel that caused them to believe the

disclosures contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements , in light of the circumstances in which they were made, not misleading circumstances in which they were made, not misleading

• Does not rule out written advice, memos and perhaps opinions

to clients

49 CLOs in the Heartland 49

QUESTIONS

50 CLOs in the Heartland

Managing CLOs Through the Cycle

Managing CLOs Through the Cycle Moderator: Kevin Kendra, Managing Director, Fitch Ratings Panelists: Matthew Andrews, Managing Director, Head of Structured Credit, CIFC Asset Management LLC Credit, CIFC Asset Management LLC Dan P. Baginski, Portfolio Manager and Director of Investments, Golub Capital Keith Oberkfell, Partner, Mayer Brown Alina Pak, Senior Director, Fitch Ratings Eddy Piedra, Vice President, Creek Source Capital/4086 Advisors

CLOs in the Heartland 52

QUESTIONS

53 CLOs in the Heartland

Closing Remarks

Kevin Duignan, Managing Director, Fitch Ratings

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