Displaying items by tag: CLOs

Middle-market collateralized loan obligations (CLOs) are gaining traction, driven by increased direct lending and investor interest, and are poised to surpass broadly syndicated CLOs. In 2023, middle-market CLO issuance reached $27.1 billion, capturing a record 23.4% of the US market.

A study by S&P Global Market Intelligence and Creditflux explores how CLO managers are adapting to this growth and managing risks, highlighting challenges like limited financial disclosures. 

S&P Global Ratings predicts that default rates on leveraged loans could rise from 1.9% in October 2023 to 3% by September 2024, underscoring the need for effective risk management. The research also examines how managers are incorporating ESG factors to meet regulatory and investor expectations.

Finsum: CLOs seem like a natural place for ESG factors to gain traction. 

(New York)

One corner of the bond market, or rather credit market, is having a tough time and it may be a negative sign for the rest of fixed income. CLOs, or collateralized loan obligations, which have been a star for several years, recent tumbled. In aggregate, CLOs dropped 5% in October, and those close to the market see more volatility to come. According to Citigroup “We think there’s more volatility coming … We recommend investors reduce risk and stay with cleaner portfolios and better managers”. CLOs are a key funder of the leveraged loan market, and weak demand there can flow through to boost borrowing costs to all corporates.

FINSUM: This is akin to a warning coming out of the high yield market, as what it reflects is worries about how leveraged companies might handle a downturn.

(New York)

One of the ways that investors or advisors might think to diversify their risk is to invest in a number of different managers. The reality is, however, that many of those managers, especially within an asset class, will all have similar looking portfolios, which means you may be much less diversified than you think. The obvious analogue is index tracking funds. There would be no point in buying multiple ETFs from different providers that all track the same index. Yet that is what investors are doing in some markets. This concept is particularly relevant for the riskier end of the credit markets right now, where the market seems to be poised for the same kind of correlated fall as happened during the Crisis. In CLOs for instance, many of the largest loans are held by a majority of the major managers.

FINSUM: This seems like a smart and timely warning. Correlation can doom even the best diversification efforts, especially when it is credit driven.