Leveraged loans are simply loans made to non-investment grade companies, which comprise the vast majority of American companies and are a critical part of the economy. Leveraged loans are responsible for helping the American economy grow and keeping the U.S. in business.
Over 70% of American companies are considered non-investment grade.
Most of these loans are provided by non-bank lenders. Lenders like making leveraged loans because they are senior, secured, and provide a safe return on investment. Turns out, betting on America pays off.
Due to increasing regulation, many banks are limited in the amount of leveraged loans they can provide to companies. Fortunately, thanks to non-bank lenders, American companies still have affordable access to financing.
Who Are Non-Bank Lenders?
Non-bank lenders are simply lenders (investors) that are not commercial banks. Collateralized Loan Obligations (CLOs) are the biggest non-bank lender, but others include mutual funds, insurance companies, pension funds and others.
What is a CLO?
A collateralized loan obligation or CLO is a securitization of corporate loans. A CLO manager creates a CLO by buying leveraged loans on the open market and packaging them into a portfolio. Investors can then buy portions of that portfolio according to their risk appetite. CLOs are similar to mutual funds in how they are set-up and operate.
CLOs provide over $440 billion in financing to more than 1,200 American companies.
CLOs have performed extraordinarily well. Cumulatively, over the last 20 years, and during the financial crisis, CLOs have suffered credit losses less than 1%. Moreover, not one AAA or AA investor has ever suffered a credit loss. This is a better performance history than nearly any other asset class, including “plain vanilla” bonds to the highest rated American companies.
Companies that access the CLO market for financing employ over 7 million people.
CLOs have historically suffered practically no losses.
No Aa or Aaa rated tranche has ever suffered impairment.
Source: Moody’s Investors Service