Structured Finance Partner Sean M. Solis Comments on Volcker Rule Changes and Impact for CLOs in Asset-Backed Alert

Milbank Structured Finance partner Sean M. Solis was recently quoted in the Asset-Backed Alert article titled “Volcker Rule Shift Prompts CLO Evolution.” The article discusses the government’s recent revisions to the Volcker Rule allowing flexibility for banks to invest in so-called covered funds, a category that includes collateralized loan obligations (CLOs). Even though banks typically confine their CLO investments to senior securities, rather than equity classes, those instruments were treated as ownership interests because they confer the ability to remove a manager, if only for cause. The updated definition explicitly excludes senior CLO paper that confers the ability to fire a manager for cause under typical scenarios. “If you only use certain types of proceeds, you can potentially have an amendment that doesn’t have a material effect on debt holders,” said Mr. Solis. “In that case, you would just need approval from equity holders.” He adds, however, that “a lot of deals have a blanket prohibition against anything that can’t be done under the original Volcker Rule.” In such cases, Mr. Solis notes, “amendments may require the approval of debtholders as well.”