A Shrinking $1.3 Trillion Securities Market Is Bad News for the Economy

For a fleeting moment this month, investment bankers in leveraged finance — the lucrative lending that oils the wheels of M&A and feeds the $1.3 trillion market for collateralized loan obligations — had rare cause for cheer. Company valuations were enticingly low for dealmakers, the US Fed looked closer to reversing punishing rate hikes, loans were getting done.

A realization that Federal Reserve Chair Jay Powell isn’t ready to turn quite yet has put those Wall Street hopes on ice. Financing packages are stalling again. A CLO industry that boomed in the cheap money era, by bundling up slices of loans and selling them as bonds, looks particularly vulnerable to the freeze.

Through a decade of low rates, bankers turned CLOs from niche securitizations into a capital markets pillar and one of the hottest finance products around. Now, much of the industry’s shrinking, starved of its usual feedstock of loans in a moribund M&A market. Demand from big US commercial banks for the largest tranche of CLOs has also cratered; better returns are on offer elsewhere.

About 40% of the securities’ issuers have yet to price a new deal this year, according to data from Citigroup Inc. “The CLO market has been gummed up for a while,” says Andrew Lennox, an investor at Federated Hermes Limited.

Sales of CLOs Plunge