Today, we published a white paper titled “Collateralized Loan Obligations: Balancing Crucial Lending with Financial Safety and Soundness,” which, in many ways, embodies the reasons behind why the Structured Finance Association exists.
Our purpose is to help our members and public policymakers grow credit availability and the real economy in a responsible manner. By providing needed background information on an important financial market segment, our intention is to provide a level set on this very large and important finance source for U.S. businesses — one that makes credit more available and affordable – while at the same time establishing that this is a market that bears watching.
SFA’s white paper is both a primer on Collateralized Loan Obligations — how they work and the role they play in expanding credit — and a straightforward assessment of why our industry and policymakers are correct to pay close attention to the potential risks in this growing market. As our core values state, we believe that all financial instruments entail risk but should not involve recklessness. Fostering an open, fact-based dialogue about what opportunities and risks exist in the use of CLOs is part of our purpose.
The CLO market is much discussed and, often, little understood. The white paper we’re releasing today provides important background on the role and importance of CLOs and offers insight into why the CLO market bears watching.
When it comes to the growing scrutiny of the CLO market by media and regulators alike, we get it. With the economy deep into an economic expansion that, history suggests, won’t go on forever, and the CLO market having grown in size and importance, it’s natural that the media, regulators and policymakers would turn their attention to it.
This is the first significant paper published by SFA’s newly created Research unit, headed by Elen Callahan, who joined our team in November following a distinguished career at Deutsche Bank.
Our white paper concludes that “CLOs allow investors with different risk appetites to invest in bonds with different levels of risk and yield. However, while CLOs allow for efficient segmentation of risk, the market must remain vigilant to protect against a wholesale degradation of in the underlying collateral. These challenges are not an indictment of the CLO market writ large, but they do bear watching as CLO funding is critical to the functioning of lower grade corporate borrowers of all sizes.”
We hope anyone interested in understanding this important market segment will find this white paper to be a useful source of information.