By Kristen Haunss

NEW YORK, Dec 5 (Reuters) - Banks predict Collateralized Loan Obligation (CLO) issuance of US$50bn to US$70bn next year, in line with 2016 volume, as the market adjusts to rules that force managers to be on the hook for a portion of their fund's risk.

There was US$65.1bn of CLO issuance this year through November 30, down about 30% from the same time period in 2015, as the market prepared for risk-retention rules that take effect December 24 requiring managers to hold 5% of their deal. Volume in 2017 may continue to be tempered, compared to 2014's record US$124bn, by the regulation or buttressed by rising interest rates that cause investors to flock to floating-rate products.

JP Morgan predicts 2017 US CLO issuance of US$50bn to US$60bn and Bank of America Merrill Lynch predicts US$60bn, according to research reports. Citigroup and Deutsche Bank expect US$65bn of volume next year and Morgan Stanley and Wells Fargo forecast US$70bn.

Monthly issuance of the funds, the biggest buyers of leveraged loans, has been increasing, rising to a 2016 high of US$10.6bn in November from US$8.4bn in October, according to data compiled by Thomson Reuters LPC Collateral.

"We have probably seen some issuance from January and February that was moved into November and December as try to close deals ahead of the risk-retention deadline," said Bjarni Torfason, a CLO analyst at Deutsche Bank. "We think January and February may be slower than the average month."

While there is no set time frame between when a CLO prices and its closing, it generally takes three to four weeks, according to Deborah Festa, head of law firm Milbank, Tweed, Hadley & McCloy's West Coast securitization and investment management practices.

Invesco priced a CLO December 1 that is scheduled to close December 21, according to LPC Collateral data.

"For logistical reasons, I think we can expect to see very few additional CLOs price this year that will target closing dates prior to the US risk-retention rule effective date," Festa said.

FLOATING-RATE REFUGE

Steady volume may be supported by investors seeking refuge in floating-rate assets as a hedge to rising rates.

CLOs pool loans of different credit quality and sell slices of the fund of varying seniority, from Triple A to B, to investors such as insurance companies. The debt slices pay investors a set rate plus Libor, so as the benchmark rises, those holders' distributions will increase.

Fed Chair Janet Yellen said in November 17 testimony before the Congressional joint economic committee that a rate increase could become appropriate "relatively soon."

The largest and most senior piece of the CLO, the Triple A slice, can also offer investors higher coupons than similarly rated investments. CLO Triple A slices paid 142bp November 28 compared to five-year, non-agency Triple A spreads of 57bp, according to Wells Fargo data.

LCM Asset Management raised a US$407.6m CLO in November that pays Triple A investors 140bp over Libor, that tied for the tightest spread of a non-static deal this year, according to LPC Collateral data.

"There is US and global demand for CLOs, from Triple A through mezzanine debt," said Maggie Wang, head of US CLO and CDO research at Citigroup.

Risk retention, part of the Dodd-Frank Act, has proven a barrier for some managers, with the number of firms issuing deals decreasing by about one-third in the last two years, according to Wang. It may also lead to larger managers issuing fewer CLOs next year.

However, President-elect Donald Trump has said he will dismantle Dodd-Frank, which if his actions limit or eliminate risk retention, may bolster CLO volume.

"Under Trump, if [risk retention] is going to be relaxed or taken out, we will see issuance or volume boosted to US$80bn, which is a very big ease, but that is assuming the market will get some clarity by mid-next year and that will help manager activities pick up and lead to bigger volumes in the second half of 2017," said Wang.

(Reporting by Kristen Haunss)