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Sec staff floats draft proposal on money funds


Top officials at the U.S. Securities and Exchange Commission are reviewing a draft proposal for controversial new reforms for the $2.6 trillion money market fund industry, according to people familiar with the matter. The draft proposal, which was formally circulated among commissioners late on Monday, outlines SEC Chairman Mary Schapiro's vision for adding safeguards to the money market funds, one of those people said. Schapiro contends those funds are still susceptible to runs, despite some reforms already put in place after the 2007-2009 financial crisis. John Nester, an SEC spokesman, declined to comment on whether a draft rule is circulating among the commissioners. "The chairman believes that reforms are necessary because money market funds remain susceptible to destabilizing runs," he said. The new safeguards are strongly opposed by the fund industry and the Chamber of Commerce. Three of the SEC's five commissioners have also publicly expressed skepticism about the need to adopt additional money market reforms beyond the ones enacted in 2010. The draft proposal is largely similar to what has already been publicly discussed by Schapiro in speeches to the industry and in testimony before Congress.

The proposal contains two potential plans. One involves the combination of a capital buffer coupled with a holdback on redemption requests by investors. The other, meanwhile, consists of a floating net asset value - a move that aims to curb investor complacency over the stable $1-per-share value that funds currently quote. The commissioners are being given 30 days to review the draft proposal, those people said, but it is unclear whether Schapiro may call a vote on the plan because she is still trying to gain support for it. She will need three votes from the five-member commission if she hopes to put it out for public comment.

A money market fund is a type of mutual fund that is required to invest in low-risk securities. While money market funds are generally considered safer than other mutual funds that pay dividends, they are not federally insured, which critics believe can cause a false sense of security. Confidence in the money fund industry was shaken in 2008 when the Reserve Primary Fund, one of the oldest and biggest money funds, broke the buck, or its per-share value fell below $1. That happened because of the fund's heavy losses on debt holdings in Lehman Brothers, which had collapsed a few days earlier.

The SEC enacted money market reforms in 2010 that tightened credit quality standards, shortened weighted average maturities and imposed a liquidity requirement on money market funds. But Schapiro is not convinced these rules go far enough."It is essential we address this risk now rather than waiting until the middle of the next crisis," she told the Senate Banking Committee last week. Other federal regulators, including those at the Federal Reserve, have also been vocal in calling for additional regulations for money market funds.

Trlpc european sponsors seek aggressive us style leveraged loans


Feb 20 Lenders are under increasing pressure from sponsors of European companies to accept more aggressive US-style terms on leveraged loans that would give them more flexibility amid an expected upturn in M&A activity. US practices such as covenant-lite structures became established features on European deals in 2014 and now other aspects of US loans are crossing the Atlantic. The changes will enable sponsors to raise additional debt and make acquisitions more easily than has been the case until now. Banks are seeking to capitalise on the expected increase in M&A activity and competition to win mandates is fierce. It means they are more accepting of requests from sponsors to underwrite deals with US-style documentation for European companies under UK law."Top-tier sponsors are pushing, and successfully so, especially on the stronger credits, for lenders to agree to more US-style docs," said Philip Bowden, co-head of leveraged finance at law firm Allen & Overy."Lenders are under increasing pressure to grant flexibility on incremental facilities to enable sponsors to raise more debt, particularly for acquisitions. As in the US, sponsors are pushing to reduce or remove the separate restrictions on making acquisitions."

Laxer loan docs also make it easier for sponsors to extract value from their assets through taking dividend payments at an earlier stage - and on lower thresholds - than they would be allowed to under traditional European lending practices.

GLOBAL VIEW One of the main drivers pushing banks in Europe to follow the US model is the increased globalisation of funds, which can invest in loans and bonds in either US dollars or euros. Given that they have already accepted such aggressive terms on US and transatlantic deals, they have limited grounds on which to push back against similar proposals in Europe, bankers said. Investors are more likely to support the laxer standards on larger loans for strong European companies in the right sectors, as such deals are likely to be more liquid on Europe's secondary market and therefore easier to trade into and out of.

"We are starting to see docs for European companies under UK law that look quite a lot like US loans. If the size and sector are right and the business is strong and stable, there is a good case for it. It gives sponsors greater flexibility as the docs don't restrict acquisitions and there is a greater chance to pay a dividend earlier than in a traditional European deal," said Matthew Sabben-Clare, a partner at private equity firm Cinven."A lot of it is to do with the consolidation in the institutional buyer base as there is more money in the market but in fewer hands, (and those) are global debt managers."If investors accept the changes on the larger European deals, in time they are likely to appear on smaller loans, too - as was the case with the use of covenant-lite, which started as a feature on larger deals before appearing lower down the spectrum."It is only a matter of time before we see more flexible terms accepted on standalone European deals," one syndicate head said.