Fitch Warns Of “Coming Storm” For CLOs

Thursday, February 21, 2019
By Paul Martin

by Tyler Durden
ZeroHedge.com
Thu, 02/21/2019

The last time we discussed trends in the US CLOs market – so critical for leveraged loan demand as CLOs account for 60% of the US leveraged loan market – we observed the sudden freeze in new issuance, which was a function of the lockup in the leveraged loan market itself a function of the sharp drop in loan prices in late 2018. Oddly, despite a sharp rebound in loan prices in the 2019…

And, according to Fitch, the collapse in CLO volumes may be set to get far worse: the reason is that with U.S. life insurers loading up on collateralized loan obligations since the financial crisis, those CLOs might prove troublesome in the next recession according to Fitch.

In a Thursday report, the rating agency warned that Insurers’ portfolios have become more risky since 2007 as corporate bonds were downgraded, highly rated bonds became scarcer and investors sought higher yields to counter low interest rates. None of this is new and is merely the scramble for new paper – any paper – which always comes alongside FOMO. And while most insurers have enough cushion to deal with a moderate economic slowdown, a more severe slump could drag credit ratings down, Fitch said.

As reported first by Bloomberg, in a report titled descriptively enough “The Coming Storm: How U.S. Life Insurers Are Positioned for a Downturn” Fitch warned that “investments in collateralized loan obligations increased markedly in recent years and could pose a significant risk if investor protections weaken late in the credit cycle,” which as most know by now, they have as a result of a near uniformity of covenant line loan issuance.

In fact, according to LCDNews, covenant lite loans now constitute just under 80% of all outstanding paper, which means that during the next recession, “secured” recoveries will be negligible at best, and far below the 80% or so that “secured” investors are used to.

The Rest…HERE

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