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

Yahoo News is better in the app -- 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.

This isn’t just a tale of woe for finance whiz kids. The impact from any prolonged shutdown — especially on extending the life of existing bundles of loans — would hit the real economy, too, making it tougher for lower-rated businesses to refinance at a time when traditional lenders are pulling back.

“It could start to look as it did before the financial crisis, when calling CLOs was the norm,” says Simon Gold, a senior trader in the bonds at Chenavari Investment Managers. “After 2008, managers started doing more resets extending the life of the securities and taking advantage of the low interest-rate environment. But now that isn’t such an easy path.”

A welcome late-summer tightening of spreads for the AAA portion of CLOs and rise in refinancings was short-lived. The market for these securities “remains challenged by macro uncertainty and interest rate volatility,” says Tetragon portfolio manager Dagmara Michalczuk. “I think the CLO market’s more of the tail and the loan market’s more of the dog,” says Ian Smith, a colleague of Hayward’s at Ares. “You need the loan market to be functioning more so than the CLO market.”

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