Starting Christmas Eve, the 2010 Dodd-Frank regulatory overhaul will require companies that package most types of loans into bonds to keep at least 5 percent of the securities they create, the Wall Street Journal reported today. The intent is to prevent a repeat of crisis-era behavior, in which loan quality fell dramatically as lenders passed all of the risk along to investors. But in the market for “collateralized loan obligations,” which are backed by junk-rated corporate loans, many issuers don’t plan to use their own money to retain the whole 5 percent. Firms including JPMorgan Chase & Co. spinoff HPS Investment Partners LLC have moved instead to set up affiliated companies that would buy the stakes. HPS and some others would own roughly 51 percent of the new firms, and outside investors would own the rest, according to market participants. The move is allowed by the rules, which say issuers can hold the securities via majority-owned affiliates. Blackstone is one company weighing whether to push that boundary further by setting up an affiliate in which it holds as little as 20 percent.
