The SEC Tells Senator Elizabeth Warren That It Is Monitoring CLO Markets

[Omaha Steve]

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Mayra Rodriguez Valladares
Contributor
Banking & Insurance

Last week, I wrote advocating that Secretary of the Treasury Steven Mnuchin, as head of the Financial Stability Oversight Council (FSOC), request more transparency about leveraged lending and collateralized loan obligations (CLOs) from banks and non-banks. I stated that Senator Elizabeth Warren had sent a letter in November to bank and financial regulators with a number of important questions about banks’ exposures to leveraged loans. She had requested answers by December 11th. Today I learned, that thus far, only the Securities and Exchange Commission (SEC) has responded to Senator Warren.

To the question, ‘Do you have concerns about the CLO market for leveraged loans?’ SEC Chairman Jay Clayton responded on January 31, 2019 to Senator Warren that he asked his staff, including the Division of Economic and Risk Analysis and the Officer of Credit Ratings “several months ago to begin reviewing these markets in more detail. In particular, I asked staff to closely monitor these markets with two issues in mind: first, the general question of whether there were elements of these markets that could have systemic or other spill-over effects in our capital markets and in particular, undetected potential effects; and second, the more specific question of whether these markets, and in particular CLOs, were structured in a way, such that changes in ratings of the securities could trigger substantial selling into markets (e.g., below investment grade markets) that historically have less liquidity.”

Chairman Clayton wrote that SEC staff “has observed a decrease in the average rating of the subordinated tranches of CLOS in each of the past two years, a potential indication of eroding credit quality in parts of the CLO market, increased risk appetite of certain CLO purchasers or some combination of these and other factors.” He also stated that the SEC is aware “of the rising debt-to earnings rations among certain leveraged loan issuers.”

FULL story: https://www.forbes.com/sites/mayrarodriguezvalladares/2019/05/06/the-sec-tells-senator-elizabeth-warren-that-it-is-monitoring-clo-markets/#d93870021241