Court ruling casts doubt on CLO loan purchases, says Moody’s

A recent US court ruling on a loan participation could have serious implications for CLOs, Moody’s suggests in the latest issue of its CLO Interest newsletter. In July, a US federal court invalidated a participation of a Cablevision loan, ruling that the participation was actually an assignment in disguise. Since assignments, unlike participations, require the consent of the borrower, Cablevision was therefore able to stop JP Morgan from selling the loan to Mexico’s Banco Inbursa using a participation.

The significance of the ruling is that casts legal doubt on one of the most popular ways to trade loans in the secondary market, and one that is widely used by CLOs. Although, as Moody’s points out, the circumstances in this case are unusual, since Cablevision wanted to block a company affiliated with one of its competitors from receiving inside information, it prompts a question about whether other courts could invalidate participations in future.