Now it is happening again, as investors and money managers scramble to buy floating-rate debt — debt offering interest payments that will increase as global interest rates rise, as they are expected to over the next few years. A big new source of floating-rate credit is the market for “leveraged loans” — loans to highly indebted businesses — that are packaged into securities known as “collateralized loan obligations,” or CLOs. Some of the debt is being used, as it always has been, to finance expansion or refinance old debt. According to Covenant Review, a debt analyst, the amount of debt used to finance these takeover deals has grown significantly, from 6.4 times cash flow in 2015 to 7.7 times cash flow in the first quarter of this year. A slowdown in the economy or a rise in interest rates could very well put those companies in a cash squeeze and result in losses for CLO investors.

Source: Washington Post July 27, 2018 17:15 UTC