Broadly syndicated loans to non-investment grade U.S. Corporations are widely misunderstood outside of the loan industry. A number of commentators imply that leveraged loans are shadowy corporate equivalents to pre-crisis sub-prime mortgages. This is clearly not true and, to respond to such conflations, the LSTA recently published this white paper addressing these views.
American Family Insurance concluded in this report that leveraged loans do not pose a systemic risk at this time. The report, authored by analyst Steven Kelly and shared with the LSTA, is a response to press and regulatory inquiries into this question such as the Bank of International Settlements report released on Sunday.
In response to many policymakers mistakenly comparing leveraged loans to the subprime crisis of the financial crisis, Lee Shaiman, LSTA Executive Director and David Lerner, Senior Portfolio Manager and Head of Senior Secured Loans and Structured Credit at Shenkman Capital Management, an LSTA member, co-authored an article featured in Morning Consult.
There have been the periodic comments that i) no one knows who owns CLO notes and ii) this might mean fire sales in a downturn. We want to tackle both these narratives head-on. To do so, we first review literature that reveals the owners of CLO notes and then we highlight recent analysis on how these holders likely will behave in a downturn. Spoiler: We know many of the holders and they’re unlikely to be forced to unwind positions.
The headline above is slightly – but only slightly – tongue in cheek. With all the noise around leveraged loans (and general silence around high yield bonds), one might think that i) loans suddenly have migrated down the capital structure and ii) loan documentation is far worse than bond documentation. In fact, neither is true.
This is a presentation that Elliot Ganz, our General Counsel and Chief of Staff, along with Michael Nechamkin of Otocagon, Jeff Bakalar of Voya and Howard Tiffen of First Trust did at the DC Finance Conference in Tel Aviv in mid June 2019
What are leveraged loans? See the attached for the answer
Do leveraged loans create systemic risk? Read this FAQ to find out the answer
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