Deutsche prices Par-Four CLO, Volcker compliance reaches Europe

Par-Four’s new $462.67m deal came together on Wednesday, with Deutsche pricing the $150m A-1 notes at 159bp over Libor and the $128m A-2 piece at 135bp over Libor. Full pricing details for Tralee III can be found in GlobalCapital’s CLO pipeline here.

Deutsche is also working on a new Chenavari's Volcker-compliant, euro-denominated Toro CLO 1, a person close to the transaction confirmed. The deal, which may price this month, is expected to be €359m in size. It is one of the first Volcker-compliant European deals to hit the market, said the person.

The European loan market is far smaller than it is in the US, and making a deal Volcker-compliant generally entails removing its ability to add bonds to the portfolio.

“It’s hard for European deals to be Volcker-compliant,” the person said. “European CLOs rely a lot more heavily on bonds than they do here. You could also get around [Volcker] by the triple-A investors giving up their chance to vote, or removing their ability to replace a manager, but most dealers and managers simply opt for no bond bucket.”

As Volckerisation gains traction in the US, JP Morgan — one of the biggest bank investors in triple-A CLO paper, before it retreated from the market late last year because of the Volcker rule — is said to be back in the market for new deals but being very selective about which managers it works with, said a market participant speaking with GlobalCapital.

“They are back in the market in the sense that they are buying new deals where they can get previous deals by the same manager Volckerised,” said the person.

Earlier this year, Wells Fargo — also a large triple-A buyer — was said to be putting pressure on CLO managers to amend legacy deals to make them compliant, using that as a precondition to its participation in new transactions, as GlobalCapital reported at the time.

JP Morgan declined to comment. Wells Fargo did not respond to a request for comment.

The US's Office of the Comptroller of the Currency recently published a set of guidelines for its examiners, explaining how to determine whether banks have business activities or investments that are subject to the Volcker rule. That follows months of silence from the body on the issue of CLOs, during which lawyers and banks active in the market have been working on a standardised set of amendments to make existing CLO indentures Volcker-compliant

Volckerisation amendments have so far mainly sought to make non-Volcker-compliant CLOs eligible for the loan securitization exclusion by removing their ability to invest in non-loan collateral like bonds, other structured products and letters of credit. Such amendments would likely need approval from all affected parties, implying equity investors would be heavily involved.

In a research note published this week, Fitch suggested such amendments would not result in downgrades for affected deals and could actually improve their liquidity.

“We do not consider this to impact the creditworthiness of the transaction as the indentures continue to allow for some exposure to unsecured collateral in the form of second-lien loans,” said Fitch. “And we believe it could benefit investors by increasing the liquidity of their holdings.”

However, amending deals that have been heavily sold into the secondary market could be challenging, said the ratings agency: “Where debt and/or equity tranches are widely held across the investor community, the logistics of obtaining positive consent from a majority may become more of a challenge”.