CLO scare: could rated tranches see losses?

Structures are more solid, but loans are dicier, and recovery rates may be disintegrating

Risk 1218 lead story AAA Stephen Lee NB illustration
Stephen Lee, nbillustration.co.uk

As the credit cycle nears its peak, alarms about complex structured products ring louder. Rating agencies, politicians and economists have called attention to the market for collateralised loan obligations (CLOs), which has more than doubled since 2013 to reach nearly $600 billion in the US as the dubious leveraged loans that feed it have passed $1 trillion.

US banks and insurers hold nearly $150 billion of CLO notes, one-quarter of the total amount outstanding.

So, could CLOs be the next

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