3i’s Ghose on Volcker compliance

We spoke with the UK firm’s head of debt management to gain a sense for how some private debt managers are meeting the onerous US regulation.

Last month the debt arm of London-listed private equity firm 3i Group launched Europe’s first Volcker-compliant collateralized loan obligation (CLO) – securitized vehicles that are largely backed by commercial loans and bonds.

The Volcker Rule prohibits US banks from owning more than three percent of a private equity or hedge fund. Although securitized loans comprised of individual loans and related servicing assets are excluded from Volcker Rule regulations, many CLOs include debt securities that do not conform, according to the Federal Reserve.

However the rule does permit European and other non-US banking to continue unabated if the CLOs activity is conducted “solely outside of the United States”, and no ownership interest in the CLO is offered for sale or sold to a resident of the US.

With so many restrictions – and exemptions – contained in the rule, how did 3i tackle this still confusing piece of US regulation? 3i Debt Management managing partner Jeremy Ghose tells pfm why his firm decided to secure Volcker compliance.

Even though it didn’t have to be, 3i’s latest CLO [Harvest IX] is proudly Volcker compliant. What was the thinking behind that decision?

Jeremy Ghose: Our view is that the Volcker rule is here to stay. The US banks absolutely have to follow it and slowly and steadily banks in Europe doing any type of business in the US will also have to follow it. As a result, we are finding that the big European banks in particular are very keen to stay on the right side of the Volcker rule.

With that context in mind, there are a number of advantages for CLOs to be Volcker compliant. Firstly, more people are subscribing to Volcker compliant vehicles and so there is an opportunity to do slightly larger CLO deals. Another advantage is the increased liquidity in terms of the CLO liabilities once the deal is done. More market participants means more liquidity in the market.

Has the Volcker rule meant the structure of the CLO has changed from those issues previously?

For us, Volcker compliance means that essentially we don’t have a bond bucket in this CLO, so we are not able to buy bonds. What we are able to buy is high yield loans.

Do you see other European firms adopting your approach and going down the Volcker-compliant CLO route?

As the demand grows in Europe you are going to get more deals that are Volcker compliant. And the deals that are non-compliant will be smaller in size, less liquid and as such the pricing will not be as competitive. Two years from now I doubt there will be many non-compliant deals in the market.