LCM Asset Management is marketing a $560 million collateralized loan obligation designed to comply with the Volcker Rule.
The deal, LCM XV, includes a $378 million class with a preliminary AAA’ rating from Standard & Poor’s that is being offered at a spread of Libor plus 150 basis points.
Morgan Stanley is the arranger.
Missing from the collateral pool guidelines described in S&P’s presale report is a bond bucket. Almost every deal issued before the final version of the Volcker Rule on Dec. 10 allowed the manager to put some money to work in below investment grade corporate bonds. The allocation was typically up to 5% or 10%. But under the Volcker Rule, a securitization backed by anything other than loans or leases is off limits to banks.
The deal, which is expected to close Feb. 25, has a two-year non-call period and a four-year reinvestment period.
The primary U.S. CLO market has been largely dormant since mid-December, as issuers and investors attempt to sort out the uncertainty created by the Volcker Rule. The few new deals have either excluded bond investments altogether or precluded them unless bank holders could be sure such investments would not run afoul of the Volcker Rule.
In research published today, analysts at Wells Fargo said that some large AAA’ buyers may be refraining from making any new investments until there is clarity on their existing holdings. “Some large AAA buyers may be asking managers to bring existing deals into Volcker compliance (selling the high-yield bonds in the CLO portfolio and/or passing amendments to eliminate the bond buckets) before investing in any new deals from that manager,” the analysts said. “This course of action has the same effect as putting a short-term buying freeze in place, due to the time required to amend older deals.”