CLOs, Private Equity, Pensions, and Systemic Risk

Dubitsky, Rod

doi:10.3905/jsf.2020.1.098

Cited by 3 publications

(2 citation statements)

References 2 publications

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“…That diversification is seen to be a credit positive for investors in highly-rated debt issued by CLO vehicles, since it lowers default correlations. 17 As of the time of writing, the credit rating agencies have been actively downgrading both the corporate loans that support CLOs and the CLO notes issued, en masse.…”

Section: Covid-era Current State Of Playmentioning

confidence: 99%

Will the COVID Pandemic Spark a Return in GFC-Type Financial Market Litigation?

Heller

Phillips²

2020

Law and Financial Markets Review

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Institutional and retail investors alike litigated extensively after the 2007-2009 Global Financial Crisis ("GFC"), alleging claims for misconduct of all varieties, resulting in settlements amounting to tens of billions of dollars. Many of these same claims may return during and in the aftermath of the current crisis, the COVID-19 pandemic. Although the exact financial instruments at issue may differ, this article draws parallels between GFC-era cases to the types of litigation that can be expected to arise out of financial losses suffered during the COVID-19 pandemic.

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Section: Covid-era Current State Of Playmentioning

confidence: 99%

Will the COVID Pandemic Spark a Return in GFC-Type Financial Market Litigation?

Heller

Phillips²

2020

Law and Financial Markets Review

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“…It has been observed for instance, that due to the underlying risks, CLO tranches should be capped at a level below triple-A. 56 Along these lines, Professor Frank Partnoy argued recently that CRAs have been underestimating the likelihood of default correlations, which would have the effect of causing downgrades also to triple-A tranches. 57 He went on to suggest that even before the pandemic, the intrinsic vulnerability of the CLO market meant that correlation assumptions should have been three to four times higher.…”

Section: The Reliability Of the Rating Processmentioning

confidence: 99%

Hail the new private debt machine: private equity, leveraged loans, and collateralised loan obligations

Bavoso

2020

Law and Financial Markets Review

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The Covid-19 pandemic and the subsequent worldwide economic slowdown have exposed the fragility of the financial sector, among others. This article argues that the seeds of this fragility, while being exposed by the pandemic, were sown earlier, in the post-2008 years, through the revived synergy of three elements of the financial system: private equity firms ascending the role of ultimate intermediaries in the system of private debt creation; leveraged loans becoming the new asset class that replaced what mortgages represented in the pre-2008 years; and collateralised loan obligations (CLOs) which in some ways replicated the function of CDOs as mechanisms of private debt creation. This article explains this phenomenon, analysing in particular how CLO structures morphed during the last decade and how this new transactional innovation facilitated a return to dangerous levels of leverage. As of 2019, the level of CLO issuance neared $120bn in the US, whereas in the EU they were close to Euro30bn. While the IMF warned at the end of 2019 about the dangers associated with the increasing levels of corporate leverage, confidence in the banking system was reiterated, largely due to the alleged safeness of CLOs, and particularly the capacity of these transactional structures to shift risks away from systemic banks. This article provides some clarity on these apparently contrasting statements, drawing inter alia some parallels with the crisis of 2008. 2. Background: CLOs and structured finance Like other forms of securitised debt, the roots of collateralised loan obligations (CLOs) lie in the technological and

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Are CLO Collateral and Tranche Ratings Disconnected?

Griffin

Nickerson

2022

The Review of Financial Studies

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Between March and August 2020, S&P and Moody's downgraded approximately 25% of collateral feeding into CLOs and only 2% of tranche values, with rating actions concentrating in junior tranches. Both S&P and Moody's modeling indicate that the impacts should have been considerably larger, especially for higher-rated tranches. Neither changes in correlation nor the accumulation of pre-COVID-19 protective cushions can explain the downgrade asymmetry on upper tranches. Instead, CLO managers repositioned their collateral pools to dampen the negative credit shock and rating agencies incorporated qualitative adjustments in their CLO ratings. Important potential policy and market implications from these findings are discussed.

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CLOs, Private Equity, Pensions, and Systemic Risk

Cited by 3 publications

References 2 publications

Will the COVID Pandemic Spark a Return in GFC-Type Financial Market Litigation?

Will the COVID Pandemic Spark a Return in GFC-Type Financial Market Litigation?

Hail the new private debt machine: private equity, leveraged loans, and collateralised loan obligations

Are CLO Collateral and Tranche Ratings Disconnected?

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