CLO market: Corporate distress? Bring it on
It is an almost unchallenged truth that the next crisis will be triggered by over-leveraged corporate borrowers crumbling under the weight of cheap debt that they have taken on over the last decade. Right in the middle of this are the CLO buyers that have made much of that lending possible. But rather than taking fright at the prospect of a slew of triple-C credits in their pools, CLO managers are running straight towards it.
A lot of people are worried about collateralized loan obligations (CLOs). These are the levered buyers that have fuelled extraordinary growth in sub-investment grade lending to $1.4 trillion worldwide, while at the same time facilitating the evaporation of loan covenants and the extension of cheap debt to highly risky credits.
Ask any market participant where they think that the next crisis is coming from and their answer will almost always be corporate credit.