Tag Archives: Collateralized Loan Obligations

$1.3 Trillion “Leveraged Loan” Boom Comes Unglued, by Wolf Richter

Leveraged loans are closely related to junk bonds, and its not a good sign when either market is coming “unglued.” From Wolf Richter at wolfstreet.com:

The Fed has warned about them, and investors fear a run-on-the-fund. 

The $1.3 trillion “leveraged loan” boom is coming unglued: Not because the junk-rated, highly leveraged, cash-flow-negative companies that issued these loans are massively defaulting – they’re not yet – but because investors are fleeing these instruments that had been super-hot for years, until October. They’re fleeing from loan mutual funds that hold these loans because they want to grab the “first-mover advantage” in an illiquid market; they want to be the first out the door before they get caught in a run-on-the-fund – with potentially catastrophic consequences for their cherished money.

These investors yanked a net of $3 billion out of US loan mutual funds and $300 million out of exchange-traded loan funds during the week ended December 19, in total $3.3 billion, the biggest outflow on record, according to Lipper. In the prior week, investors had yanked out $2.5 billion, which at the time had also been a record. It was the fifth week in a row of net outflows exceeding $1 billion, also a record.

Since the week ended October 31, the week all this started, the net outflow has reached $11.3 billion.

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“Concerned” Bank of England Raises Alarm about Growth of High-Risk Loans, by Don Quijones

The market for high-risk loans that have little or no protections for creditors has ballooned. From Don Quijones at wolfstreet.com:

The power of Collateralized  Loan Obligations.

“The global leveraged loan market is larger than – and growing as quickly as – the US subprime mortgage market was in 2006,” said the Bank of England’s Financial Policy Committee in the statement from its latest meeting. And the committee is “concerned by the rapid growth of leveraged lending.”

In terms of magnitude, the US and EU “leveraged loan” market combined now exceeds $1.3 trillion, up from $50 billion at the turn of the century.

A “leveraged loan” is a loan that is extended to junk-rated (BB+ or lower), over-indebted companies. These loans are considered too risky for banks to keep on their books. Instead, banks sell them to loan funds, or they package them into highly rated Collateralized Loan Obligations (CLOs) and sell them to CLO funds and other institutional investors. In the UK, over £38 billion ($50 billion) of these loans were issued in 2017 — more double the amount in 2016 — and a further £30 billion ($39 billion) has already been issued in 2018.

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