Waterfall of payments in CLOs, via Morgan Stanley, which estimates that 85% of outstanding CLOs in the U.S. may fail their junior over-collateralization (OC) tests as leveraged loans default.

Waterfall of payments in CLOs, via Morgan Stanley, which estimates that 85% of outstanding CLOs in the U.S. may fail their junior over-collateralization (OC) tests as leveraged loans default. pic.twitter.com/cx2GFlAXL5

— Tracy Alloway (@tracyalloway) May 7, 2020

The CLO market is currently pricing just a fraction of the defaults expected in the underlying loans, say UBS analysts, who see leveraged loan default rates rising to 22% in a worst-case scenario & 9% in an optimistic scenario. https://t.co/mkk2VTdh98

— Lisa Abramowicz (@lisaabramowicz1) May 1, 2020

Closer look at CLO's
The appeal for leveraged loans and lower tranches is the double digit returns they offer, particularly being amplified in an environment of falling interest rates. The $700B in CLO's out of $1.2T for the broader market of leveraged loans.

— SiloBridges Capital (@SiloBridges_Cap) May 1, 2020