CLOs Are Inflicting Serious Pain to Risk Takers
The structures are starting to crumble at lower ratings, and the Fed is unlikely to come to the rescue.
Taking a beating.
Photographer: Donald Miralle/Getty Images
About two years ago, I wrote my first column on collateralized loan obligations. It followed a Barron’s article pointing individual investors to funds that buy the riskiest equity and junior debt of CLOs and offer double-digit yields. I posited that the peak must be close, based mostly on a hunch that markets only get truly frothy when mom and pop show up.
With the benefit of hindsight, that turned out to be about right. Oxford Lane Capital Corp., a fund flagged by Barron’s that traded at $10.53 in July 2018, would top out at $11.50 a month later. It’s now worth just $3, not far from its low in March. Eagle Point Credit Co., which traded at $18.65 at the time, would climb by less than a dollar over the following year and is now hovering around $5.75. While these investments are known for their high yields, that’s still a steep loss in total value. And unlike public equities and even high-yield bonds, the funds show little evidence of rebounding anytime soon.