Surge in CLO Issuance Triggering the 2008 Global Financial Crisis
Record High Issuance This Year... Low-Credit Companies Face Default Risk and Investors Suffer Losses if Interest Rates Rise
[Asia Economy Reporter Byunghee Park] It has been confirmed that the issuance of collateralized loan obligations (CLOs), structured products bundling loan receivables from companies with low credit ratings, has reached an all-time high. CLOs are a type of structured product similar to collateralized debt obligations (CDOs), which caused problems during the 2008 global financial crisis.
According to Standard & Poor's (S&P) Global Market Intelligence, the new issuance of CLOs this year has exceeded $59 billion as of the 20th (local time). The Wall Street Journal reported on the 24th (local time) that CLOs are being issued at a record pace since S&P began compiling related statistics in 2005. According to S&P, the year with the highest CLO issuance was 2018, when $128.9 billion worth was issued. Bank of America (BOA) expects this year’s CLO issuance to reach $360 billion, while Citigroup forecasts $290 billion.
CLOs are structured products issued backed by corporate loans. Companies with low credit ratings, which find it difficult to issue corporate bonds or raise funds, can raise capital by issuing CLOs together with other companies.
The reason for the increase in CLO issuance is that the risk of corporate bankruptcy is decreasing amid historically low interest rates. According to credit rating agency Moody’s, only six non-financial companies went bankrupt in the first quarter of this year, marking the lowest since 2018. Moody’s projected that the default rate, which stood at 7.5% at the end of March, will fall to 3.9% by the end of this year. Accordingly, credit rating agencies are reportedly considering the possibility of upgrading the credit ratings of many CLOs.
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Experts point out that companies with low credit ratings may borrow amounts they cannot manage through CLOs. They also warned that if interest rates rise due to inflation concerns, these low-credit companies could face bankruptcy risks, causing losses for CLO investors.
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