Credit Suisse Said to Plan $500 Million U.S. CLO Amid Slow Start

Credit Suisse Group AG is planning a collateralized loan obligation of about $500 million in the U.S. amid slower issuance as fund managers seek a clearer understanding of the requirements of the Volcker Rule.

Bank of America Corp. is assisting Credit Suisse’s asset-management unit with Madison Park Funding XIII, according to a person with knowledge of the transaction, who asked not to be identified because the deal hasn’t been priced.

Sales of CLOs have lagged behind the amount sold last year at this time as managers of the funds, which buy junk loans and help finance leveraged buyouts, await clarification on their treatment under the Volcker Rule. The regulation, adopted in December as part of the financial overhaul mandated by the Dodd-Frank Act, may force banks to divest their CLO holdings, according to the Loan Syndications and Trading Association.

“The primary CLO market has thus far been rather quiet in 2014,” Bank of America Corp. analysts led by Chris Flanagan wrote in a Jan. 24 research note. The “lackluster activity” is linked to the Volcker Rule, they wrote.

Drew Benson, spokesman for Credit Suisse, and Bank of America spokesman Zia Ahmed declined to comment on the CLO.

The LSTA said earlier this month that it sent a letter to federal regulators, its second, seeking clarity about whether under the Volcker Rule banks with CLO holdings would be able to keep their right to remove a manager without triggering “ownership interest.” Debt securities deemed to be ownership interests can’t be held by banks, according to a statement from the trade group.

‘Unintended Consequences’

The LSTA on Jan. 10 filed a third letter with regulators and Elliot Ganz, executive vice president and general counsel of the LSTA testified on Jan. 15 before the House Financial Services Committee that the “unintended consequences” of the Volcker Rule would hurt businesses that turn to CLOs for debt financing.

Three CLOs totaling $1.2 billion have been sold this year in the U.S., compared with more than $9 billion in the same period of 2013, according to the Bank of America analysts. CLO managers raised more than $82 billion in the U.S. last year and 7.7 billion euros ($10.5 billion) in Europe, according to the report.

Credit Suisse issued three U.S. CLOs totaling about $2 billion in 2013, according to the person. In Europe, the Zurich-based bank raised a pool totaling 309 million euros, said the person.

Manageable Risk

“Once the treatment of CLOs under the Volcker Rule is clarified, we should see a pickup in issuance activity,” the Bank of America analysts wrote in the Jan. 24 report. “We believe that the risks associated with the Volcker Rule should ultimately be manageable for U.S. CLOs.”

Wells Fargo & Co. is forecasting $60 billion of the funds will be raised this year in the U.S. Last year’s total of $82.6 billion was the most since $104.7 billion in 2007, according to the San Francisco-based bank.

“The U.S. CLO primary market is still largely dormant, as issuers and investors attempt to sort out the uncertainty created by the Volcker Rule,” David Preston, an analyst with Wells Fargo, wrote yesterday in a research note. Issuance will probably begin to accelerate as CLO managers form pools that prohibit investment in bonds, Preston said.

CLOs are a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and returns. They also purchase bonds, which managers may have to sell to help banks remain compliant under the Volcker Rule, according to the Wells Fargo report.

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