LONDON, July 5 (Reuters) – A financial stream that helped fund the world’s riskiest companies and grew into a market estimated at $1.5 trillion in the low interest rate years is drying up, as aggressive rate hikes bring tougher borrowing conditions and uncertainty.
The pace of issuance of so-called collateralised loan obligations (CLOs), which bundle loans of the weakest corporates and repackage them as bonds, has stalled.
Specialist asset managers minted CLOs worth more than half a trillion dollars in 2021, a year of heavy post-pandemic monetary stimulus. Almost $69 billion worth were launched or refinanced during the first half of this year, down 41% on the same period in 2022, JP Morgan data shows.
These vehicles, popular with hedge funds, insurers and asset managers when borrowing costs are low and investors hunt for yield, account for up to 60% of demand for the junk loans rated single B or below, according to S&P Global Ratings.
But the market has sputtered just as companies whose debt is considered a speculative investment face a mountain of refinancing needs in coming years.
The sharpest rise in global interest rates in decades, an anticipated global recession and fewer new CLOs to support junk rated borrowers potentially create a toxic cocktail of corporate distress.
“There haven’t been large credit losses yet, but the expectation is that bankruptcy rates [for corporate loans] will go up,” said Rob Shrekgast, a director at KopenTech, an electronic trading and analytics platform for CLOs.
STORM CLOUDS
CLOs have grown into a market worth about $1.5 trillion, KopenTech said.
Looking ahead, demand for the bonds issued by these vehicles will “decline meaningfully,” Bank