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The SEC has issued a no-action letter that will allow Golub Capital and other middle market lenders to issue CLOs through a business development company (BDC) without falling foul of conflicting regulations covering risk retention and investment companies, a move that could be a further boost to US middle market corporate lending.
The SEC wrote to Golub Capital on Friday with a no-action letter that fixes a snag in the regulation of middle market firms looking to issue risk-retention compliant CLOs through a BDC structure.
The risk retention requirement was vacated for managers of open market CLOs in February this year, but the rule is still in place for some types of CLO that fall outside of that definition, including middle market CLOs issued through a lender’s BDC.
When the risk retention rules, part of Dodd-Frank reforms, came into force in 2016, some BDCs looked to have the risk retention requirement transferred from their external manager (the sponsor) to the BDC, which originated the loans.
Under Dodd-Frank, it is possible for the sponsor to do this under certain conditions.
While this appeared an attractive solution,...