But it is not intuitive that fear of these future losses should cause such turmoil in other credit sub-sectors. There have been few actual losses on the underlying loans – although there is no reasonable bid for bonds backed by them. Nor have there been any corporate defaults, so the speed with which the booming leveraged loan buyout phenomenon has run into investor intransigence –some would call it a restoration of plain common sense – has caught lending banks by surprise.
Investors have apparently decided that the trend of aggressive loan terms and leverage ratios should end. Having seen first-loss positions in ABS (sub-prime) CDOs wiped out, equity investors in CLOs have understandably become more cautious. It should surprise no one that risk managers at investment banks are scaling back warehouse lines for CLOs – there is plenty of evidence that...
