Marathon Said to Raise Fund That Solves the CLO Regulation Dilemma

  • Fund seen exceeding target of as much as $250 million
  • Pool already big enough to help create $4 billion of CLOs

Marathon Asset Management has figured out a way to put up less of its own capital while still complying with new rules aimed at curbing excessive risk-taking by managers of collateralized loan obligations.

The firm has raised about $200 million for a fund that will help it fulfill a new regulatory requirement for CLO managers to hold a portion of their deals, according to a person with knowledge of the matter. The investment manager, which oversees about $12.5 billion, plans to tap its new fund to own about half of the so-called equity tranche of its CLOs, the person said.

The risk-retention rules, which go into effect in December 2016 and are part of the Dodd-Frank Act aimed at preventing a repeat of the 2008 crisis, require managers to hold 5 percent of their CLOs. While regulators say the rules will force issuers to have some skin in the game, putting up the necessary capital may prove too expensive for some to stay in business.

Marathon Chief Executive Officer Bruce Richards in February said the firm was seeking to capitalize on the regulation that he said could force half of CLO managers out of the market. 

Regulatory Puzzle

“We’ll see how many managers are able to solve the regulatory puzzle, which is risk retention, and how many managers can’t,” Richards said at the iGlobal Forum’s Global Distressed Investing Summit in February.

Marathon’s fund, which will be completed in 2016, is expected to exceed its $200 million to $250 million target and is already large enough to help the firm issue about $4 billion of CLOs over the next several years, said the person, who asked not to be identified because the fundraising is private.

A $461 million CLO that Marathon raised in June with the assistance of JPMorgan Chase & Co. didn’t meet risk-retention rules. But its next deal, which could be issued as early as this year, will be in compliance, according to the person.

Ryan FitzGibbon, a spokeswoman for Marathon who works at Prosek Partners, declined to comment.

‘Capital Intensive’

CLOs are the biggest purchasers of leveraged loans and provide borrowers with a stable source of financing. They buy high-yield corporate debt and slice it into securities of varying risk and return.

About two-thirds of managers will need to find some way to meet risk-retention rules because they’re not large enough to do it on their own, according to Maggie Wang, Citigroup Inc.’s head of U.S. CLO research.

"It’s capital intensive to comply," she said. "You want to get out ahead of the curve, especially if you want to raise capital."

About $83 billion of new CLOs have been raised in the U.S. this year, compared with a record $124 billion in 2014, according to a Wells Fargo & Co. research report last week. Issuance has slowed amid the recent market turmoil that’s in part tied to concerns about the slumping energy and metals and mining sectors.

Even "larger managers with more than $5 billion of CLO assets might also consider finding outside financing to the extent that makes it less expensive for them," Wang said.

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