Since 2014, US CLOs have effectively been corporate loan securitisations after the Volcker rule outlawed 10% bond buckets. Generally, this has shored up CLO portfolios (with loans having higher recoveries than bonds), but it has also limited managers’ trading flexibility. If the Volcker rule amendment passes, then it is likely that CLO managers with high yield platforms will be the first to benefit. “Track record is going to be crucial,” says Dagmara Michalczuk, portfolio manager at Tetragon Credit Partners. “Bond buckets are not without problems. The reality is that recoveries on bonds are lower than on loans so, initially, managers that have a proven record managing high yield will be entrusted with bond flexibility. It could take a while before a 5% bond bucket becomes market standard.”

The European CLO market may give an indication on how the return of bond buckets will play out in the US. Bond buckets are a big part of the European CLO market, but investors only give prominent high yield specialists the latitude to load up on bonds. PGIM tends to have the biggest exposure to bonds across its European CLOs at over 11%. Other managers steer clear of bonds, with Partners Group notably putting together predominantly loan-focused European CLOs. Larger bond buckets tend not to have much of a bearing on CLO liability pricing. US regulators approved a re-proposal of the Volcker rule on 30 January and opened up a 60-day comment period, which ends 1 April. After this, the agencies will issue a final rule. Unlike in Europe, where bond buckets can reach 30% (PGIM), the US is set to be limited to 5%. When the Volcker rule came into play in 2014, US CLOs incorporated springing bond buckets into their documentation. But sources say these provisions ended up being written out of CLO docs during negotiations between debt and equity investors as part of CLO repricings.