Follow the rebounding CLO

Traders work on the floor of the New York Stock Exchange.

TEXT OF STORY

KAI RYSSDAL: This isn't to say the credit squeeze is over with, but there are some signs things might be starting to turn around. Deutsche Bank says the market for a type of security known as CLOs appears to be on the rebound.

Bear with us, here -- Marketplace's Amy Scott is going to explain what CLOs are, and why you ought to care about them.


SCOTT: CLO stands for Collateralized Loan Obligation. It's basically a pool of loans that trades like a stock or bond. Investors make money from the payments on the underlying loans.

CLOs have financed a lot of the big corporate buyouts in recent years. But demand took a dive in July, when investors started to shun any kind of questionable debt. According to Deutsche Bank, that demand is starting to pick up again.

Last month, investors bought close to $8 billion in CLOs -- that's near pre-crunch levels. Martin Fridson runs the research service Leverage World. He says unlike securities backed by subprime mortgages, CLOs are backed by loans mostly in good standing.

MARTIN FRIDSON: It's not the case, as it is in the mortgage-backed sector, where clearly there are already very substantial defaults.

Because CLOs are key to financing buyouts and mergers, a recovery in the CLO market might boost corporate deal-making, which had been a major driver of economic growth. But some observers say it's too soon to call a rebound.

Mike Bacevich invests in corporate loans for Hartford Investment Management. He says many of the CLOs issued in September had been in the works for months -- he's not seeing any interest in new CLOs.

MIKE BACEVICH: I was in New York just yesterday, and I met with four investment banking houses. And the response was universal: That, while there might be a handful of issues that take place for the balance of this year, by and large the CLO market is shut.

Bacevich predicts it will be several months before it opens again, when enough brave souls step back into the market that others start to follow.

In New York, I'm Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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