(BK) Bank of New York Mellon to Divest Alcentra Unit

On Friday, Bloomberg reported that The Bank of New York Mellon Corporation (BK) is planning to sell-off its Alcentra unit, which manages $17 billion worth of assets including loans and high-yield bonds. Alcentra has been a subsidiary of BNY Mellon since January 2006.

BNY Mellon has 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. CLOs are a category of collateralized debt obligation that put together high-yield, high-risk loans and slice them into securities of varying risks and returns.

Bloomberg also stated that David Forbes-Nixon (Alcentra chairman), Kevin Heine (BNY Mellon spokesperson) and Jack Grone (Credit Suisse spokesperson) refused to comment on the issue.

The new regulatory rules proposed in the Dodd- Frank Act are expected to compel lenders to hold at least 5% stake in any debt package they sell. Hence, new CLOs creation might stop as a result of such a rule.

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, this would lead to scarcity of loan and capital market credit in Europe.

Earlier this month, 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).

Hence, BNY Mellon is trying to lap up the opportunity that is available to it from the sale of the Alcentra unit along with its CLOs. The company is focused on speeding up the divestiture as after the implementation of the provisions restricting formation and sale of CLOs, the company might not be able to find buyers for CLOs.

BNY Mellon currently retains its Zacks # 4 Rank, which translates into a short-term ‘Sell’ rating. However, considering the fundamentals, we are maintaining a long-term “Neutral” recommendation on the stock.

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