CLOs: senior holders have less to fear than sellers
There is a new bogeyman on Wall Street: collateralised loan obligation.
The rush by UK pension funds to offload assets to meet margin calls has hit the $925bn US CLO market. Leverage loan prices have fallen to as low as 92 cents on the dollar in recent weeks. The fear is stress in this part of the market could lead to a credit crunch in the wider leveraged loan market. But the angst is misplaced.
CLOs buy up risky corporate loans and repackage them into securities with varying levels of risk and return. Their structure is similar to CDOs, or collateralised debt obligations. But while mortgage-backed bonds contributed to the 2008 financial crisis, CLOs made it through largely unscathed and have grown in popularity since.
This story originally appeared on: Financial Times - Author:Tax Cognition
