Self liquidating arbitrage loans

The SPV sells the rated debt securities and simultaneously uses the proceeds to purchase the loan portfolio from the sponsoring bank.Some bank CLOs are self-liquidating, and provide for all loan payments to be paid through to investors as principal and interest on the debt securities.This article summarizes the benefits to banks of undertaking a CLO, discusses important rating agency and legal considerations affecting the structuring of a CLO, and describes the steps required to complete a CLO transaction.

Credit-linked notes can be used as collateral in lieu of the related commercial loans where the actual loans cannot be assigned without the consent of the borrower or another loan participant, or can be used to create derivative instruments with terms that more closely match the payment characteristics desired by investors than those of the actual loans.It should be noted that the risk-based capital benefit of a CLO transaction may be reduced or altogether eliminated if the sponsoring bank or an affiliate retains all or a portion of the subordinated debt securities or equity securities of the CLO issuer, or otherwise guarantees or provides credit support to the transaction.Under the risk-based capital guidelines as in effect in the U.As more and more of these transactions are done, the up-front expenses should decline as transaction participants and the market become more familiar and comfortable with the CLO "technology." While the need to minimize credit and other risks through diversification of the loan pool ultimately limits the degree to which small portfolios may be securitized, it may be expected that progressively smaller transactions will be achievable, and that the universe of banks that can profitably use the CLO technology will increase significantly.This article summarizes the benefits to banks of undertaking a CLO, discusses important rating agency and legal considerations affecting the structuring of a CLO, and describes the steps required to complete a CLO transaction..

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S., a bank that retains such a subordinated or equity security, or provides credit support for sold assets, is generally treated as if it had retained the credit risk of the entire portfolio of sold assets, unless the bank's retained interest is less than the capital requirement applicable to the sold assets, in which case, under the so-called "low level recourse" rule, the bank must maintain capital on a dollar-for-dollar basis against the retained security or credit support liability.

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