On Dec. 19, 2019, the Financial Stability Board issued a report titled “Vulnerabilities Associated with Leveraged Loans and Collateralised Loan Obligations”. The Financial Stability Board (FSB) coordinates at the international level the work of national financial authorities and international standard-setting bodies in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. The Report notes that the markets for leveraged loans and Collateralised Loan Obligations (CLOs) have grown significantly in recent years, with the majority of issuance activity concentrated in the US and to a lesser extent the European Union (EU).
The Report further notes that, recently, several authorities and international financial institutions, including FSB members, have expressed concerns about the rapid growth in the leveraged loan market and the lower credit quality of corporate debt more generally.
The Report assesses the vulnerabilities and potential financial stability implications of developments in the leveraged loan and CLO markets.
The main conclusions from the Report are as follows:
- A number of factors suggest that vulnerabilities in the leveraged loan and CLO markets have grown since the global financial crisis. The degree of borrowers’ leverage has increased and, although loans tend to have lower credit ratings, there is some evidence that certain changes to loan documentation that weaken creditor protection…