Credit Quality For CLOs Collapsing

Credit quality for collateralized loan obligations (CLO) is weakening on several fronts. An April 5 Moody’s report notes that the core structure of the loan products and their related investor protections are favoring the borrower at a time when the US Federal Reserve and Securities and Exchange Commission haven’t challenged a February court ruling exempting the investment products from specific Dodd-Frank provisions. The recent moves are part of a trend towards lower credit requirements that Moody's has been warning of for more than a year.

The regulators decision not to challenge a circuit court’s ruling that CLO funds that were exempted from...