Key Points
Market Background
Leveraged Loans
The global leveraged loan market size, as of December 2019, was estimated to be approximately USD 1.4 trillion1. The outstanding amount of leveraged loans has almost doubled since the Global Financial Crisis. Lending standards have eroded with the share of covenant-lite loans increasing and a deterioration in credit quality.
Since 2008, the outstanding amount of leveraged loans has grown by approximately 80%2. At the same time, the quality of the loans has steadily declined:
Collateralized Loan Obligation (CLO) Investors
Depending on the tranche of bonds, there are different categories of investors involved in the CLO bond market:
Source: Bank of England, Fideres
Impact of the COVID Crisis on CLOs
What Is the Likely Impact of the COVID Economic Crisis on CLOs?
In a recent report6, Fitch estimated that approximately 11.80% of loans held by CLOs are at high risk of default while 35.5% are classed as medium risk.
Leveraged loan default rates were relatively mild in the aftermath of the Global Financial Crisis as a result of the aggressive monetary easing central bank policies. Back in 2008, LIBOR represented 77% of the overall interest rate cost to borrowers. Now, that portion is only 32%. Therefore, even a reduction of interest rates will not make interest payments affordable to highly leveraged borrowers who are witnessing their revenues collapse.
As a result, we expect the current economic crisis to result in significantly higher default rates, and for a longer period of time, than what were observed during the Global Financial Crisis. Given the lower credit quality of the loans, and the prevalent covenant-lite nature of the loans originated in the last ten years, we also expect recovery rates to be significantly lower than historical ones.
Our scenario analysis assumes:
What Does this Mean for CLO Investors?
The table below summarises our expectations of losses for each tranche of CLO bonds.
Future Litigation
We expect to see the following litigation themes to emerge:
Sources:
- Differences in the criteria and thresholds applied by data providers to identify a leveraged loan leads to different estimates of the size and other characteristics of the market, even within the same jurisdiction; Source: https://www.fsb.org/wp-content/uploads/P191219.pdf
- Bank of International Settlements, https://www.bis.org/publ/qtrpdf/r_qt1909.htm
- S&P Leveraged Commentary & Data
- Bank of England: https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2019/july-2019.pdf?la=en&hash=976688AB50462983447A8908BE079743A3E3905F
- Bank of England: https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2019/july-2019.pdf?la=en&hash=976688AB50462983447A8908BE079743A3E3905F
- Fitch Ratings: https://www.fitchratings.com/site/pr/10112736
- We assume that USD 800bn across CLO tranches are outstanding; 1.6% average excess spread ; typical CLO capital structure of 7.5% equity, 5% BB tranche and 5% BBB tranche and default rates jump to 15% in 2021 and 10.5% in 2021
- Title IIIa of Regulation No 462/2013
- Regulation No 462/2013 and Directive 2013/14/EU

Alberto is a founding partners of Fideres, with over 21 years of cumulative industry experience.
His area of expertise is complex antitrust investigations and regulatory advisory work. He has handled some of Fideres’s largest and most complex economic investigations into the collusive practices of the financial industry, including ISDAfix and LIBOR benchmark manipulation, Generic Pharmaceuticals Cartel case and, more recently, abuse of dominance cases against monopolistic digital platforms. Before founding Fideres, he held senior managerial positions in New York and London at investment banks including UBS, ABN AMRO and The Royal Bank of Scotland. His investment banking expertise was in in fixed income bonds and derivatives markets, with a specialty in structured products.
Alberto holds master-level degrees in Engineering from Politecnico di Torino and from Ecole Centrale Paris.