Stuck in first

11 May 2020 By Neil Unmack, Anna Szymanski Follow @unmack1

The vehicles that buy most leveraged loans are suffering as downgrades saddle them with too much ropey debt. The Federal Reserve’s lending facilities will help – but not enough to gin up much appetite for new loans. Private equity dealmaking could be stuck in the slow lane.

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Moody’s on April 20 said it had placed the ratings on 967 bonds issued by collateralised loan obligations on review for downgrade, citing the risk of losses from the coronavirus lockdown. The rating actions affect $23.3 billion of securities.

Collateralised loan obligations are investment vehicles that buy leveraged loans and fund them by issuing securities of varying risk and return. The securities affected by the Moody’s rating action are all middle- and lower-ranking tranches, rated mostly Baa3, the lowest investment-grade level, and below.

“Given the severity and breadth of the economic downturn to date and diverse potential future paths to recovery, we believe that CLO mezzanine and junior tranches may be materially more risky than before the coronavirus crisis,” Moody’s said in a statement.

Collateralised loan obligations have $680 billion of assets under management in the United States and 130 billion euros in Europe, according to Refinitiv data.

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