Wall Street’s debt machine is being powered by a familiar engine: securitisation.
As scrutiny of the $1.2tn leveraged loan market has increased, focus has turned to the market’s main source of support: collateralised loan obligations.
CLOs are vehicles which take a group of risky loans and then use them to back a series of bonds of varying degrees of safety. Investors in the most perilous, lowest-rated “tranches”, as they are known, are rewarded with higher returns but are hit first if the underlying loans — issued to low-rated or heavily indebted companies across the US — begin to default.
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