A financial stream that helped fund the world's riskiest companies and grew into a market estimated at $1.5 trillion in the low interest rate years is drying up, as aggressive rate hikes bring tougher borrowing conditions and uncertainty, Reuters reported. The pace of issuance of so-called collateralized loan obligations (CLOs) has stalled. Specialist asset managers minted CLOs worth more than half a trillion dollars in 2021, a year of heavy post-pandemic monetary stimulus. Almost $69 billion worth were launched or refinanced during the first half of this year, down 41% on the same period in 2022, JP Morgan data shows. These vehicles, popular with hedge funds, insurers and asset managers when borrowing costs are low and investors hunt for yield, account for up to 60% of demand for the junk loans rated single B or below, according to S&P Global Ratings. But the market has sputtered just as companies whose debt is considered a speculative investment face a mountain of refinancing needs in coming years. The sharpest rise in global interest rates in decades, an anticipated global recession and fewer new CLOs to support junk rated borrowers potentially create a toxic cocktail of corporate distress. While low now, debt defaults are rising. A restructuring at French retailer Casino and the bankruptcy of U.S. retailer Bed Bath & Beyond expose cracks in business models that were previously insulated by abundant money supply and low rates, analysts said. S&P Global estimates that more than one in 25 U.S. businesses and almost one in 25 European companies will default by March 2024. The CLO market has slowed because investors want higher payouts as compensation for the risk of lending to weaker borrowers.
