The future of a $700 billion market for risky corporate debt rests on companies like Portillo’s Hot Dogs, Chicago’s famous fast-food chain, the Wall Street Journal reported. Portillo’s owed about $550 million in loans when it stopped serving inside its 62 restaurants in March. It was suddenly at risk of going bust and credit-ratings firms quickly slashed grades on its borrowings. The company’s loans sit on the books of dozens of collateralized loan obligations (CLOs), which buy up risky corporate debt and package it into securities. With sales way down, many of those companies have gone from just being risky to teetering on the brink of bankruptcy. Retailers like Neiman Marcus and J.Crew Group Inc. have already tipped over the edge. The stress is testing the CLO market, which has allowed companies to rack up debt, often to fund private-equity buyouts. So far, only modest cracks have appeared in CLOs, but they threaten to cut off a cheap source of corporate credit and cause losses for investors who stretched for a bit of extra return. CLOs have become the dominant force in high-risk lending, buying about 60 percent of new leveraged loans in the past few years. In total, CLOs own about half the U.S. market, according to LCD, S&P Global’s loan research arm.
