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CVC's European arm uses Volcker Rule workaround in third CLO

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Federal regulators may be fast-tracking changes to the Volcker Rule, but CVC Credit Partners is taking no chances with its second European collateralized loan obligation of 2018.

The €414.2 million CVC Cordatus Loan Fund XI will issue exchangeable shares for four classes of notes; the exchangeable shares to not have voting rights, and therefore do not have a controlling interest in the fund.

The Volcker Rule prohibits U.S. banks from owning "covered funds," a category designed to capture hedge funds that also includes most CLOs. Most U.S. CLOs avoid running afoul of Volcker by relying on an exemption for funds that invest exclusively in loans, eschewing high yield bonds. That's a less attractive option in Europe, where loans are more scarce.

According to a presale report from Moody’s Investors Service, the firm will issue €331 million of the Class A, B, C and D notes that do not have voting rights. This means that U.S. banks can purchase them even though the deal's collateral includes bonds.

Debt securities issued by an investment fund would not normally be considered controlling interests, but for the fact that they have the right to terminate a fund's manager, for cause.

CVC has included such exchangeable notes in its last three transactions dating to last July. Carlyle Group is another major European CLO issuer placing nonvoting exchangeable notes into the U.S. market.

The classes with nonvoting notes include the triple-A-rated Class A notes totaling €241 million (which has an assumed price of 84 basis points above three-month/six-month Euribor), the €12 million Class B-1 tranche (rated Aa2 by Moody’s, priced at a 150 basis-point spread), the €30 million fixed-rate Class B-2 tranche (also Aa2, with a 2.1% coupon), the €28 million in Class C notes (rated A2, with a 190 basis point spread) and the €20 million in Class D notes priced at 295 basis points over Euribor, and rated Baa2.

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