On Monday, Bloomberg, quoting reliable sources, reported that The Bank of New York Mellon Corporation (BK) has called-off the proposed divestiture of its Alcentra unit, which manages nearly $17 billion worth of assets including loans and high-yield bonds. Alcentra has been a subsidiary of BNY Mellon since January 2006.
Earlier in August, Bloomberg had reported that BNY Mellon was planning to sell-off its Alcentra unit. The company had hired Credit Suisse Group (CS) to manage the sale of the majority of Alcentra assets in collateralized loan obligations (CLOs) in the U.S. and Europe.
Over the last 10 years, CLOs have been a key source of funding for European loans, with majority of them reaching the end of their reinvestment period by next three years. So, when CLO creation would slow down or stop, it would lead to scarcity of loan and capital market credit in Europe.
In August, Citi Capital Advisors, the global alternative asset management platform of Citigroup Inc. (C), had announced the acquisition of the CLOs business from DiMaio Ahmad Capital LLC. Similarly, Carlyle Group had acquired a $500 million CLO from Foothill Group Inc., a unit of Wells Fargo & Co. (WFC).
The new regulatory rules proposed by the Dodd- Frank Act are expected to compel lenders to hold at least 5% stake in any debt package they sell. Such a rule might lead to the suspension of CLOs creation altogether.
Hence, BNY Mellon’s decision to stop the sale of its Alcentra unit stems from the fact that though the regulatory rules might prevent the company from creating more CLOs, at present the company is trying derive full benefit from it. With the European market largely depending on CLOs as a source of funding, BNY Mellon is taking advantage of the situation.
However, sooner or later BNY Mellon will have to vend off its Alcentra unit, as after the implementation of the provisions restricting formation and sale of CLOs, the company might not be able to find buyers for CLOs.
Currently, BNY Mellon retains its Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we are maintaining a long-term “Neutral” recommendation on the stock.
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