CLOs Stutter, Threatening to Curb Demand for Leveraged Loans
- Higher funding costs, scanty loan supply hinder CLO issuance
- Self-correcting dynamics could restore CLO equity returns
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Collateralized loan obligations in Europe are facing the toughest conditions since early 2016 as they struggle with higher funding costs and a scarcity of loans. This could curtail issuance from these funds and curb demand for loan assets.
CLOs account for around half the investor base for leveraged loans. A slowdown in CLO formation could force borrowers to pay higher spreads on their loans, ultimately bringing these funds back into the game by restoring the gap between what they must pay on their funding costs and what they earn in interest from their loan portfolio.