Collateralized loan obligations have two years to become compliant with the Volcker Rule or lose their biggest investors – banks –  but some CLO managers aren’t wasting any time. They are not only divesting any bonds backing these deals, they are also eliminating the ability to invest in bonds in the future.

The Volcker Rule prohibits banks from having an ownership interest in CLOs backed by anything but loans (and cash equivalents). That’s a problem for most CLOs printed in 2011, 2012 and 2013, which tend to have the ability to invest 5% or 10% in bonds. This qualifies them as a “covered fund” under Volcker. And because banks tend to own the senior debt securities issued by CLOs, which gives them the ability to remove the managers, for cause, they can be considered to have an ownership interest in these deals.

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