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1 1 (June 11, 2020)

handle is hein.crs/govddxz0001 and id is 1 raw text is: Researh Sevice Leveraged Loans and Collateralized Loan Obligations (CLOs): Recent Developments and Policy Actions June 11, 2020 Leveraged loans are a type of corporate debt extended to highly indebted companies. Borrowers often use leveraged loans to fund general operations or finance private equity firms' leveraged buyouts. Some leveraged loans are packaged into collateralized loan obligations (CLOs) through securitization. Leveraged loan and CLO markets' risk profile and rapid growth have drawn policy attention in recent years. Some are concerned that, when under stress, potential credit rating downgrades and escalating defaults in these markets could amplify financial system vulnerability. During the COVID- 19-induced economic downturn, the heightened market stress and reduced corporate earnings have led to performance deterioration in leveraged loans and CLOs. The related price decline is more evident for the lower-rated CLO tranches. The pricing reflects the investors' expectation that the relevant loss absorption structures may protect senior tranches while eroding certain equity and mezzanine tranches. The Federal Reserve (Fed) announced support for some highest-rated CLOs, benefiting certain newly issued CLOs. This Insight examines selected performance measures of leverage loans and CLOs and the related federal government interventions. Leveraged Loan Market Growth Since the 2007-2009 financial crisis, the leveraged loan market has increased, reaching $1.2 trillion (Table 1). As the market has grown, certain creditor protections called covenants-terms in the loan contract that allow the creditor to monitor the borrower and take certain corrective actions before a payment default occurs-have become less prevalent in many leveraged loan contracts. Congressional Research Service https://crsreports.congress.gov IN11421 CRS NStGHT Prepaimed for Mernbei-s and Committees 4 o. C- --q .. . . . . . . . ..-----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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