It appears that the three largest U.S. banks have begun to prepare for the much-awaited (and doubted) comeback of the CLO market.

Following the debt markets’ record rally this year, JPMorgan, Bank of America and Citigroup have been approaching leveraged loan managers to offer terms for new CLOs, according to Bloomberg. Frankfurt-based Deutsche Bank, Germany’s biggest bank, is also considering creating CLOs with loan managers.

Market participants began to report banks approaching loan managers earlier this quarter (Leveraged Finance News, Oct. 28, 2009).. “I have heard that some underwriters are approaching the largest CLO managers about potential deals in 2010,” a West Coast-based investor told Leveraged Finance News at the time.

However, some still doubted the likelihood of an imminent comeback for the market. Several CLO market participants noted that the arbitrage between the senior financing and the yield on other assets, mainly those that are trading on the secondary, will continue to make it difficult for any new CLOs to launch. “You need two pieces — attractive equity rates and reasonable financings — to create that arbitrage,” a New York-based CLO manager told Leveraged Finance News.

The $440 billion market for CLOs largely disappeared at the end of 2007, and its return could help companies refinance $1.5 trillion of high yield loans and bonds maturing by the end of 2014.

“Market conditions have improved dramatically over the course of this year, which we see carrying on into 2010,” Philippe Roger, JPMorgan’s global head of structured credit trading, told Bloomberg. “We are actively discussing the market environment with our clients, and think that they are going to be increasingly attracted both to the leveraged loan asset class and securitization technology and applications related to the high yield space.”

New issues of CLOs could reach $3 billion to $6 billion next year, according to a Wells Fargo Securities report issued Monday.

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