The biggest buyers of US junk loans are expected to shrink their exposure to the $1.4tn market in 2023, as the Federal Reserve’s campaign of interest rate rises sparks rating downgrades and defaults.
Collateralised loan obligation vehicles own roughly two-thirds of America’s low-grade corporate loans — but may be forced to reduce their exposure because of credit downgrades, which could unsettle the markets and make it harder for companies to obtain financing.
CLOs, which package up such loans into various risk categories before selling the slices on to investors, have performed well during tough economic times, but analysts say mechanisms designed to protect investors holding higher-quality tranches could reduce the vehicles’ appetite for loans to risky, highly-indebted borrowers.