Are CLO managers getting away with murder?
The amount of dry powder that private equity firms now have means they are sometimes putting even more than 50% equity into deals – it’s a huge cushion that is contributing to reckless lending behaviour in the debt markets. But are lenders taking too much comfort from a buffer that could rapidly disappear?
Illustration: Sam Hadley
What came first, the leveraged loan chicken or the CLO egg?
Seven rate hikes by the Federal Reserve since December 2015 have prompted a wholesale shift of the sub-investment grade credit market from fixed-rate bonds to floating-rate loans, largely because issuers are safe in the knowledge that there is a seemingly insatiable investor base of collateralized loan obligations (CLOs) desperate to buy.
Around $274 billion of leveraged loans were issued in the US in the first half of 2018, and the market is forecasting a record $150 billion of CLO issuance to mop them up. CLOs buy around 65% of all US leveraged loans, and retail investment in the asset class has also now soared to a 20% market share.
The roots of the US CLO market’s record-breaking year can be traced back not only to the pace of loan issuance but also to the February decision by the US Appeals Court that these vehicles would no longer be subject to retention regulations under the Dodd Frank Act.