Trouble Brews for American Companies That Gorged on Cheap Credit
Cutting off a lifeline for troubled borrowers would lead to more bankruptcies.
The collateralized loan obligation, or CLO, is one of those funky creations of Wall Street wizardry that have been around for decades. Just like its close cousin, the much-castigated collateralized debt obligation, it’s a tool used to package a bunch of high-risk debt together—mortgage bonds for CDOs, corporate loans for CLOs—so they can be easily sold to investors hungry for juicy returns.
Unlike the CDO, the CLO made it through the financial crisis largely unscathed and has boomed in the decade since. Fueled by the unprecedented $3.5 trillion wave of private equity buyout deals during the past decade, and rock-bottom U.S. interest rates that only stoked investors’ willingness to gamble on riskier assets, the CLO market has more than doubled since 2010, to $660 billion. By providing abundant cheap funding to the less creditworthy end of the market, it’s helped grease the wheels of the longest economic expansion in U.S. history.