The Volcker Rule: The Long and Winding Road to a Mixed Result for CLOs

Abstract

In one of the more intriguing chapters of the four-year-old Dodd–Frank saga, the potential impact of the so-called Volcker Rule on collateralized loan obligations (CLOs) finally became clearer. The results are decidedly mixed. The bottom line? As issued, the Final Rules, while permitting CLO managers to issue new loan-only CLOs, will force banks to divest or restructure a significant number of legacy CLO notes by July 21, 2017, potentially forcing them to recognize significant losses. How we got to this result, and what it means for the CLO market, are the focuses of this article. It seems that the CLO Volcker Rule saga will play out with some wins (new CLO issuance is continuing unabated) and some losses (debt securities of CLOs that have securities baskets will be considered ownership interests in covered funds). As the conformance period gets closer, it will be interesting to see what banks holding CLO notes do, whether legacy CLOs can be amended or refinanced, and how many, and at what price, CLO notes will be divested in order to comply with the Volcker Rule.