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February 20, 2014

CLO Issuance Jumps as U.S. Managers Bet on Volcker Rule Verdict

“Federal Reserve Chairman Janet Yellen said last week that clarification on how the Volcker Rule treats collateralized loan obligations would be coming “reasonably soon.” Managers of the funds that package junk-rated buyout loans aren’t waiting to find out.”

“The Volcker Rule prohibits banks from investing in a CLO if the fund owns bonds. After issuance fell to a 17-month low in January, firms including CIFC Corp. (CIFC) raised CLOs this month either by getting rid of the option to purchase bonds or preserving the right to do so, according to people with knowledge of the deals, who asked not to be identified because the terms are private.”

“To ensure compliance, CLO managers have three different structures they can use on new deals as issuance in the first two weeks of the month surpassed all of January, which saw a slump driven by a lack of clarity about the final shape of the Volcker Rule. Members of Congress sent a letter Feb. 12 to the different regulators expressing “support” for guidance on the rule and how it will be applied to CLOs.”

“’We do not like giving up the optionality, if and when bonds are cheap again, but if that is what it takes to do a deal, we are willing to consider’ eliminating the bond-investment option, John Fraser, managing partner at 3i Debt Management U.S., the U.S. debt-investment arm of London-based buyout firm 3i Group Plc, which oversees $3.5 billion, said in a telephone interview.”


Read full Bloomberg article by Kristen Haunss here.

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