trending Market Intelligence /marketintelligence/en/news-insights/trending/Fk_96R585lsgZfl4Q_1Vlw2 content
Log in to other products

Login to Market Intelligence Platform


Looking for more?

Contact Us

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

If your company has a current subscription with S&P Global Market Intelligence, you can register as a new user for access to the platform(s) covered by your license at Market Intelligence platform or S&P Capital IQ.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *
  • We generated a verification code for you

  • Enter verification Code here*

* Required

Thank you for your interest in S&P Global Market Intelligence! We noticed you've identified yourself as a student. Through existing partnerships with academic institutions around the globe, it's likely you already have access to our resources. Please contact your professors, library, or administrative staff to receive your student login.

At this time we are unable to offer free trials or product demonstrations directly to students. If you discover that our solutions are not available to you, we encourage you to advocate at your university for a best-in-class learning experience that will help you long after you've completed your degree. We apologize for any inconvenience this may cause.

In This List

CLOs could pose systemic risk if economy goes bad, FSB says

Street Talk - Ep. 64: Coronavirus jumpstarts digital adoption

Street Talk Podcast

Street Talk - Ep. 63: Deal talks continue amid bank M&A freeze, setting up for strong Q4

Street Talk Podcast

Street Talk - Ep. 62: 'Brutal' outlook for oil demand offers banks in oil patch no relief

Amid Q1 APAC Fintech Funding Slump, Payment Companies Drove Investments

CLOs could pose systemic risk if economy goes bad, FSB says

Leveraged loan and collateralized loan obligation markets are more vulnerable to macroeconomic shocks than a decade ago, and could pose a systemic risk in a downturn, according to a report by the Financial Stability Board.

SNL Image

The rapid growth of the leveraged loan and CLO markets since the financial crisis of 2008 has concerned many institutions, with the lower credit quality of corporate debt more generally suggesting that the market may be impacted as economic growth slows, the FSB report said.

The securitization of leveraged loans through CLO issuance exceeded pre-crisis levels in 2014 and has grown subsequently, with the combined leveraged loan markets of the U.S. and EU reaching $1.4 trillion, according to LCD, a division of S&P Global Market Intelligence.

Comparisons with the collateralized debt obligations that contributed to the financial crisis has rung alarm bells for the FSB, which was created at the G-20 summit in London in 2009 to monitor risks in global market. An investigation into CLOs was launched in March.

Ready to act

FSB Chairman Randal Quarles has previously suggested it could act if the FSB see hazards in the market, such as a risk that investors would pull the rug out from under indebted institutions if the market turns.

Leveraged finance has hit the headlines as investors have looked to financing high-yield bonds and leveraged loans in a world where traditional financial assets are providing little yield.

Leveraged loans have been used to fuel a boom in mergers and acquisitions.

The FSB identified weaker documentation and the uptick of leverage as a key concern. Changes to loan documentation that have weakened creditor protection are not fully priced in, according to the FSB. "This has the potential to not only increase default rates and decrease recovery rates for leveraged loans, but also to exacerbate investor reactions to shocks."

'Complexity and opacity'

The growing role of non-banks such as insurance companies, pension funds and broker/dealers as creditors is also a concern. The FSB warns this may have "increased the complexity and opacity" of leveraged loan and CLO markets, potentially making them more vulnerable to macroeconomic shocks.

"Insurers represent the largest non-bank holders of CLOs, and their exposures include lower-rated tranches," the FSB said. "Stress episodes could therefore have negative implications for insurers, pension funds and other non-banks with CLO exposures."

The researchers identified the holders of around 79% of outstanding leveraged loans and 86% of CLOs, but there is little known about the direct exposures of some non-bank investors, especially to the lower-rated CLO tranches.

'Data gaps'

Banks retain the most concentrated exposure to the sectors but the FSB found the exposure of banks is concentrated among a small number of large, international banks, increasing the potential systemic risk.

"The FSB will consider whether there is scope to close data gaps, will continue to analyze the financial stability risks and will discuss the regulatory and supervisory implications associated with leveraged loans and CLOs."