DODGIN’ DODD FRANK

Jefferies’ loan tack

Debt got you down? Jefferies says it can lighten the load.

The smallbutscrappy investment bank is peddling a clever way to help fund managers unload riskier debt — loans made to companies with junk credit ratings — and still meet tougher capital requirements. The trick is a rather loose interpretation of a new DoddFrank rule aimed at curbing lax lending, sources told The Post.

Socalled collateralized loan managers buy leveraged loans that they slice up, package and resell as securities to other investors. Like mortgagebacked bonds and other forms of securitized debt, collateralized loan obligations are subject to new regulations intended to prevent another financial crisis.

Specifically, the DoddFrank Act has a “riskretention” rule that requires CLO managers to keep at least 5 percent of the economic interest in their deals.

Most CLO managers will struggle to raise enough capital to satisfy the riskretention rule that takes effect at the end of next year. This has the packaged loan industry on edge as it braces for a wave of exits and mergers.

In turn, a reduction in the number of CLO funds could make it harder and more expensive for less creditworthy companies to borrow.

CLO funds own $500 billion of the $1.2 trillion in junk loans outstanding in the US, according to S&P Capital IQ. Yeartodate CLO issuance is $90 billion, well below 2014’s $124 billion fullyear total, the Loan Syndications and Trading Association said.

This is why Jefferies, led by CEO Richard Handler, is pitching the packaged loan industry. Jefferies’ view of the rule is that it requires a manager to hold 5 percent of the credit risk — but not specifically equity in the CLO fund.

Every CLO consists of slices of debt from perhaps as many as 200 different corporate loans — the idea being that if one of the pieces fails, the others will continue to perform and keep the fund from collapsing.

So far, CLOs have remained relatively safe investments even during the downturn.

Jefferies says it will guarantee the safest 90 percent of a CLO fund; all the CLO manager has to hold is 5 percent of the riskiest 10 percent at the bottom.

The average CLO fund is $500 million, which means instead of putting up $25 million, a CLO manager in the Jefferiesarranged fund would only need to invest $2.5 million.

“It’s quite fascinating, but I don’t know how you get there from a legal point of view,” a CLO expert said of Jefferies’ strategy.

Jefferies is working with an insurance company to guarantee CLO funds. The name of the insurer could be not learned, but the bank has long had a partnership with Massachusetts Mutual Life Insurance Co. Jefferies declined to comment.

A CLO manager with knowledge of the pitch said Jefferies can guarantee a limited number of CLOs and it already has around 30 applicants. The SEC has not blessed the loan structure, so the CLO manager could be penalized along with Jefferies if the agency believes the bank is playing fast and loose.

CLO managers raising new funds want to be in compliance now as they often look to refinance their CLOs after a few years and will not be able to do so unless they can satisfy regulators.