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. “We have been watching the market very closely and have seen degradation in investment grade. BBB is the new A,” says Aoiffe McGarry, director in ABS syndicate at Citi in New York. “It is very competitive and corporates have been able to take advantage of structurally strong capital markets.”
This is most definitely also the case in the sub-investment grade markets, where firms have been funding at unprecedentedly cheap levels. “But if the cycle turns you want to be in the secured space because there are protections there. Investors are beginning to worry about their exposure to US corporates and I think the US consumer will fare better,” McGarry warns.
That concern has prompted a lot of people to take a very hard look at the pools of corporate loans within the more than $750 billion CLOs that are now outstanding globally.
