CLO Hysteria: Fact versus Fiction

It has been ten years since the financial crisis and many pundits are using this arbitrary anniversary to prognosticate the next great financial calamity. This week, collateralized loan obligations (CLOs) took their turn in the spotlight, cast as the villain most likely to bring the global economic system to its knees.

Make no mistake. Risk is elevated. This is particularly true for the broader corporate credit arena. Central banks responded to the global financial crisis by providing unprecedented amounts of liquidity, which fueled debt market growth and investor risk taking—as a percentage of GDP U.S. non-financial corporate debt is near the peaks seen in the tech bubble of the late 1990s and the housing bubble of the mid-2000s.

It is also true that much of the recent credit expansion has been in non-traditional categories, including senior loans, the underlying collateral of CLOs. However, gaining a comprehensive view of risk in this environment requires a deep understanding of the idiosyncrasies of the different instruments used to gain corporate credit exposure. As headlines and fear mongering rhetoric reverberate future doomsday scenarios caused by CLOs, panic is not the proper course of action. Below we offer our clients the following insight to help them most efficiently navigate the path ahead.

Proven Track Record: CLOs Tested “Through-the-Cycle” Performance

First and foremost, it is important to understand that CLOs are not some new, flashy financial instrument born out of current market exuberance—CLOs have been around since the late 1980s.