C-MOA Structure Facilitates CLO Risk Retention Compliance | Practical Law

C-MOA Structure Facilitates CLO Risk Retention Compliance | Practical Law

The LSTA published an update describing a new CLO structure, the Capitalized Majority Owned Affiliate (C-MOA), examined in an article by Dechert LLP. The C-MOA structure is designed to facilitate compliance by CLOs with new risk retention rules.

C-MOA Structure Facilitates CLO Risk Retention Compliance

Practical Law Legal Update 9-618-2216 (Approx. 3 pages)

C-MOA Structure Facilitates CLO Risk Retention Compliance

by Practical Law Finance
Published on 27 Aug 2015 • USA (National/Federal)
The LSTA published an update describing a new CLO structure, the Capitalized Majority Owned Affiliate (C-MOA), examined in an article by Dechert LLP. The C-MOA structure is designed to facilitate compliance by CLOs with new risk retention rules.
On August 14, 2015, the LSTA published an update describing current trends in the collateralized loan obligation (CLO) market. In the article, the LSTA noted that a strong start for CLOs in 2015 quickly tailed off of the 2014 pace (by the end of August, cumulative CLO issuance is estimated to be $15 billion below equivalent 2014 levels).
The LSTA also noted that the US CLO market faces regulatory challenges in 2016, including risk retention requirements scheduled to take effect for US CLOs on December 24, 2016. According to the update, of the 120 US CLOs issued this year, only about 13 have meet US risk retention standards, creating an obvious need for new structures to address risk retention requirements in the US CLO market.
The LSTA cites an article by Dechert LLP that examines one such structure, the Capitalized Majority Owned Affiliate (C-MOA), which combines elements of both the Capitalized Manager Vehicle (CMV) structure and the Majority Owned Affiliate (MOA) structure.
A CMV structure involves the creation of a newly capitalized and self-managed CLO manager that manages the CLO and holds risk retention interests going forward for a number of transactions. An MOA structure involves the CLO manager forming a majority-owned affiliate, of which it either holds more than a majority of the voting interest and economic equity or controls significant economic decisions and owns a controlling financial interest, allowing the CLO manager to continue to be the collateral manager and receive fees, while the risk retention interest and the proceeds thereof are held by the MOA vehicle.
According to Dechert, the C-MOA structure combines these, allowing CLO managers to:
  • minimize the initial investment of time and money needed to create a new capitalized, self-managed asset management business or give up the control required to create a standalone asset management business as would be required under the CMV structure; and
  • create a CLO structure that can be carried forward (as opposed to a one-off solution) and that is consistent with EU risk retention rules, which could be difficult under the MOA structure.
Dechert notes, however, that the C-MOA may require more capitalization than other structures (largely as a result of EU requirements) and certain tax considerations may arise if the C-MOA earns fees for collateral management.
For an in-depth discussion of the considerations relating to the use of a C-MOA structure and the mechanics involved in establishing a C-MOA vehicle, see Dechert LLP's The Rise of the C-MOA.