Sales of bundled U.S. corporate debt known as collateralized loan obligations are on course to surpass levels reached at the height of the credit bubble, as the relentless search for yield leads investors to abandon caution.
The sales illustrate the rise in risk-taking by investors recently burnt in the financial crisis. In addition to renewed appetite for CLOs, private equity firms are buying out companies at record highs and investors are snapping up repackaged subprime U.K. mortgages that lenders are eager to get off their books.
Sales of CLOs, which pool leveraged loans made to low-rated companies, dried up in the years after the global crisis but have since come roaring back as investors seek out the higher returns on offer from buoyant credit markets.
While corporate defaults have so far been rare amid continued low interest rates, regulators including the Federal Reserve have been warning that parts of the credit markets – including leveraged lending – risk overheating.
Sales of CLOs in the U.S. so far this year have reached $42 billion and analysts are upping their full-year forecasts to as much as $100 billion, which means issuance could easily surpass the $89 billion sold in 2007 and potentially even the $97 billion sold at the CLO market's peak in 2006.
The CLOs sold now, known as "CLO 2.0s", differ from their pre-crisis predecessors. Bankers pack the second generation of the products with additional financial support and have stricter rules about underlying collateral that are meant to make the securitizations safer.
"I'm feeling more demand right now than I think I've ever felt in the 2.0 product," said Brad Larson, who heads the CLO business at Credit Suisse.