CLOs (Collateralized Loan Obligations)… What’s Going On?

by Potstick3rs

So I’ve been looking at CLOs (Collateralized Loan Obligations) recently and I’ve got to say… This stuff sounds like a “largest bag of odorous excrement” to quote Jeremy Irons. If you’re not familiar with CLOs you should read this great article on that goes into a fair amount fo detail: www.naic.org/capital_markets_archive/primer_180821.pdf

From my point of view, it’s the CDOs of 2008, except, instead of mortgages, it’s corporate debt. Where does this come back to bite us? How exposed are the banks? How big is the market? Apparently, early 2019 estimations put the CLO exposure at $1.4T worldwide. However, recent independent examinations put the market at $1.8T in the U.S. alone. From what I understand, corporations that are too risky or too crappy to get a regular investment-grade loan, or even perhaps a junk loan, are still given loans (called leverage loans), with extremely high-interest rates. However, no lender, not even with high-interest payments, wants to hold on to this stuff. So they package a bunch of them together into SPVs called CLOs, and sell them off. Now, who owns them is also a bit of confusion to me but if anyone on here can answer the following questions that would be great.

1) How to track them/ Where to find more information on what’s inside

2) How exposed are the banks (re-packaging side)

3) Who is exposed?

recent article/ independent examinations: www.forbes.com/sites/mayrarodriguezvalladares/2019/09/22/leveraged-loans-and-collateralized-loan-obligations-are-riskier-than-many-want-to-admit/#ce877ea6602b