Plea over new rules for boom era debt Participants in the booming market for bundled leveraged loans have mounted a last-ditch effort to persuade regulators to reconsider new rules that would force banks to hold on to a piece of the "sliced and diced" debt. October 30 was the last day to submit feedback on the proposed "risk retention" rules covering the market for collateralised loan obligations, part of the sweeping financial reform mandated by the Dodd-Frank Act. CLOs buy up leveraged loans and slice them into pieces that can be tailored to the risk appetite of a variety of investors. BlackRock, the world's biggest asset manager, said in its comment letter that the rules proposed by US regulators "risk causing a contraction in the CLO market [that] could be expected to impact the corporate credit markets." Other CLO managers and industry groups argued that the market for new CLOs would shrink by 75 per cent if the rules went ahead as currently proposed. Demand for CLOs dried up after the financial crisis but has come roaring back in recent years as yield-hungry investors seek exposure to the leveraged bank loans. But many market participants have warned that the new risk retention requirements are one of the few things that could derail the resurgent market. The proposed rules require CLO managers to retain a 5 per cent interest in the securities or for banks to hold on to 5 per cent of the loans bought by a CLO. The idea is to better align the interests of CLO managers and originators with those of investors but critics of the rules argue that this idea applies more to the mortgage securities that banks built and distributed before the financial crisis. "CLOs, managed by professional investment firms independent of the sellers of the loans, are wholly different from the sponsored asset-backed securities that we believe are the proper focus of the risk retention regulations," BlackRock said. The Loan Syndications and Trading Association (LSTA), an industry group, pushed in its letter for regulators to create an exemption for higher quality loans. Such an exemption would mimic the "qualified mortgage" provision that excludes certain home loans from similar risk retention rules applied to mortgage-backed securities. "Over the past 16 years, there have been impairments on less than 1.5 per cent of CLO notes and most were cured with no losses to note holders," said Meredith Coffey, of the LSTA. This level of financial performance surpasses that of investment grade bonds. Still, the leveraged loans that underlie CLOs have drawn scrutiny in recent months with regulators including the Office of the Comptroller of the Currency criticising 42 per cent of the leveraged loan portfolio in their last review of US credits. About $64.2bn worth of CLOs have been sold in the US so far this year, according to S&P Capital IQ LCD. That is the highest since the $88.9bn sold in 2007, just before the crisis, and surpasses last year's issuance total of $54.3bn. The rules, proposed as part of the regulatory overhaul mandated by the Dodd-Frank Act, would lead to consolidation and drive up costs to issue CLOs, the largest buyers of leveraged loans.