Collateralized Loan Obligations: Subprime Déjà Vu?

By George Oldfield and John Anthony (January 28, 2019, 12:29 PM EST) -- With a record volume of low credit quality loans being securitized in funds that issue collateralized loan obligations, or CLOs, alarm bells are ringing for some market observers, and some investors, who cite parallels to the subprime mortgage market in the 2004-2008 era.[1] Given the amounts of B, B- and CCC credit rated loans backing large, AAA rated tranches in newly structured CLO issuing entities, it is important to review carefully each step in the securitization process. If the subprime mortgage parallels prove to be prescient, a credit crunch will lead to extensive litigation brought by unhappy investors and regulators. In particular, due diligence and disclosures on loans, underwriting practices, portfolio management operations, loan servicing, representations and warranties in offerings documents and fiduciaries' actions are all likely avenues for plaintiffs to explore in seeking redress if CLO investments go south....

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