Wary of CLOs? Global Regulator Makes It Worse

Leveraged loans are risky. So, too, are the lowest-rated parts of collateralized loan obligations, which bundle together the speculative-grade loans. That assessment is hardly controversial: It’s simply what the credit grades indicate.

Rather, tensions tend to flare up when describing just how risky leveraged loans and CLOs are for the financial system as a whole. The way many market insiders tell it, leveraged loans are sufficiently spread across institutions with various objectives and mandates. To them, CLOs, which own about half the market, are a stabilizing force because they don’t experience outflows from skittish investors. On the other side, the boom in leveraged lending is an easy target for anyone looking to make an early call on the origins of the next financial crisis. Somewhat dicey borrowers, looser lending standards and debt pooled into investment vehicles owned across Wall Street? Check, check and check.