CLOs Increased Low-Quality Loan Holdings in a Reach for Yield

Collateralized loan obligations, the biggest buyers of U.S. leveraged loans, have built up exposure to low-quality deals over the past two years, according to Barclays Plc.

Their ownership of low-grade debt has risen to 4.3 percent of holdings from more than 2 percent in September 2013, according to a Barclays research note Friday. CLO managers have sought to boost returns with risky, CCC rated loans after regulation implemented under the 2010 Dodd-Frank Act prevented them from holding high-yield bonds.

"Along with most risk assets, loans and CLOs have struggled amid the persistent macro volatility," Barclays credit strategists led by Bradley Rogoff wrote in the note.

For now, managers have enough cushion to withstand future downgrades or even continue an opportunistic reach for higher-yielding debt, as they’re typically allowed a 7.5 percent allocation for CCC rated loans, according to the report.

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