December 16, 2020 - The Government Accountability Office (GAO) released a report on Wednesday finding that leveraged loans and CLOs do not pose a threat to financial stability at this time according to regulators.
The report states that based on regulators’ assessments, leveraged loans have not contributed to the distress of any large financial entity. Robust bank capital has made exposure to leveraged loans manageable, and insurers and other investors do not appear to be overly exposed.
The report also notes that CLOs do not pose similar risk to the financial system as did similarly-structured vehicles in the 2008-2009 financial crisis. The report notes that present-day CLOs “have better investor protections, are more insulated from market swings, and are not widely tied to other risky, complex instruments.”
The report also finds that while mutual funds have experienced redemptions during the coronavirus pandemic, these have been met from the sale of leveraged loan holdings. This activity may have put downward pressure on loan prices, but depressed prices have not posed a broader threat to financial stability.
The LSTA is glad to see that the report provides additional support for points that we have made over the last two years. The report should play an important role in future discussions on the safety and soundness of the leveraged loan market. Along with the recent economic impact study of the leveraged loan market, commissioned by the LSTA, the report strongly supports arguments against burdening the loan market with unnecessary regulations.
