Recent developments suggest that deals which priced prior to March 31 will not be subject to the Joint Committee’s interpretation of the sole purpose test.
As detailed in our OnPoint published earlier this week (which can be found here), on March 31, 2025 a Joint Committee (JC) comprised of the European Banking Authority, European Insurance and Occupational Pensions Authority and European Securities and Markets Authority published a report (JC Report) on the functioning of the EU Securitisation Regulation. The JC Report included guidance regarding the interpretation of the sole purpose test, stating that the term “predominant” should be interpreted as a threshold of more than 50%. As a result of this interpretation, more than 50% of an originator’s revenues must be derived from sources other than the exposures to be securitized or the risk-retained assets (or any corresponding income from such exposures and risk-retained assets).
Following the release of the JC Report, one of the market’s biggest concerns was whether this interpretation should apply to CLOs which priced before publication of the JC Report but had not yet closed. The JC Report provides that, going forward, any new issuance should apply the above interpretation of “predominant.” In our previous OnPoint, we argued that there is a reasonable case for considering issuance to have occurred at pricing, and therefore, the new interpretation should not apply to any deals priced before March 31.
We understand one of the main supervisors is of the view that CLOs that priced before publication of the JC Report but which have not yet closed should be grandfathered. While there is no assurance that other supervisors will share this perspective, this significantly strengthens the argument for grandfathering deals priced before the JC Report's release. We anticipate that the market will likely adopt this approach moving forward.
