CLOs Face Key Risk as UK Pension Plans Are Dumping Them
- The percentage of B- loans in CLOs is the highest on record
- CLOs could be burdened by CCC debt if there are downgrades
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UK pensions are offloading collateralized loan obligations as the nation’s bond markets plummet, and at least some investors fear CLO prices could fall further because of a key risk embedded in the securities.
CLO managers take portfolios of leveraged loans and package them into bonds. The risk in the resulting securities stems from a guideline that can constrain these asset managers: less than 7.5% of their portfolio should be rated in the CCC tier, the lowest grades of debt that commonly trade in the market.