Debate over CLOs misses the mark

Concerns voiced over the growth of collateralised loan obligations (CLOs) shows that many commentators on both sides of the debate are still too blinded by the hangover of the 2008 crisis to appreciate the nuances of the next one.

  • By David Bell
  • 02 Aug 2018
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The US leveraged loan market is on track to hit a post-crisis record for annual issuance for the second year in a row, and the CLO market is drawing flak from some corners of the market for helping to fuel the boom.

Stoking fear of securitization is easy. But it also misses the mark.

It is true that CLOs aregrowing riskier. Loan underwriting is being done on looser terms, investor protection is being weakened, and some CLO managers are working in subtle changes to documentation that Moody’s warned last week could increase the risk for CLO buyers.

CLO managers are quick to point out the strong historical performance of CLO debt. No double- or triple-A rated CLO tranches have ever suffered impairments.

But similar things were said of mortgage credit before that blew up. With the proliferation of cov-lite structures and the wide use of dubious Ebitda adjustments, there is no guarantee that the loan market will perform as strongly through the next downturn as it did during the last one.

But the CLO market does not represent the same kind of systemic risk that subprime mortgages posed before the last crisis. It is still pretty small beer compared to the total amount of outstanding corporate debt. Banks are in better financial shape than they were back then too. And the CLO market is not being overlayed with derivatives in the same way that subprime RMBS was.

The CLO market is unlikely to be the root cause of the next crisis. Market participants on both sides of the debate are guilty of leaning too heavily on the last crisis as an analytical crutch for determining future sources of peril.

  • By David Bell
  • 02 Aug 2018

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 302,654.45 1175 8.04%
2 JPMorgan 295,926.30 1292 7.86%
3 Bank of America Merrill Lynch 277,651.59 935 7.38%
4 Barclays 229,979.10 854 6.11%
5 Goldman Sachs 205,171.65 674 5.45%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 43,227.81 174 7.06%
2 JPMorgan 38,825.76 78 6.34%
3 Credit Agricole CIB 33,071.14 158 5.40%
4 UniCredit 32,366.25 145 5.29%
5 SG Corporate & Investment Banking 31,330.98 120 5.12%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 13,024.03 55 8.96%
2 Goldman Sachs 12,162.67 59 8.37%
3 Citi 9,451.48 53 6.50%
4 Morgan Stanley 8,054.41 48 5.54%
5 UBS 7,829.15 30 5.38%