This Atlantic article, written by Professor Frank Partnoy of UC Berkeley, describes at length how CLOs—complex securities comprised of risky loans issued to highly indebted companies—pose a significant threat to the financial system.
The article includes a quotation, reproduced below, from Dr. John Griffin, President of Integra.
“I’ve been concerned about AAA CLOs failing in the next crisis for several years,” Griffin told me in May. “This crisis is more horrifying than I anticipated.”
Under current conditions, the outlook for leveraged loans in a range of industries is truly grim. Companies such as AMC (nearly $2 billion of debt spread across 224 CLOs) and Party City ($719 million of debt in 183 CLOs) were in dire straits before social distancing. Now moviegoing and party-throwing are paused indefinitely—and may never come back to their pre-pandemic levels.
The prices of AAA-rated CLO layers tumbled in March, before the Federal Reserve announced that its additional $2.3 trillion of lending would include loans to CLOs.
The full article by Professor Partnoy can be found at the Atlantic at the this link.