Who Holds the $3.2 Trillion in “Leveraged Loans” and CLOs?

Murk everywhere. There isn’t even an agreement what “leveraged loans” are. No, banks are not off the hook. They hold 57% of these instruments, the Bank of England found.

Leveraged loans are risky. They’ve been issued by junk-rated overleveraged companies that are often owned by private equity firms. These loans are often packaged into highly rated Collateralized Loan Obligations (CLOs). The Fed, the Bank of England, and other central banks are fretting about them publicly in their Financial Stability Reports. Leveraged loans are traded in slices like securities, but they’re loans, and not securities, and so securities regulators don’t regulate them, and no one regulates them. No one knows into whose balance sheets they can blow holes. And there is not even any agreement what exactly leveraged loans are.

In short, they’re risky and murky.

But investors have the hots for them all over the world. With about $13 trillion of global investment-grade debt trading at negative yields, thanks to idiotic central-bank policies focused on financial repression rather than a sound economy, institutional investors have to take on huge risks to get a little yield, and these leveraged loans and CLOs fit that bill perfectly.

Depending on whose definition of leveraged loan we use, there are either $1.3 trillion globally – these are the loans that are included in the S&P leveraged loan index – or, by a broader definition that Bloomberg uses and that the Bank of England (BOE) uses in its Financial Stability Report, $3.2 trillion.

“Given the lack of a consistent definition of leveraged lending, there is uncertainty over the total stock of outstanding leveraged loans,” the BOE says.

So the BOE’s staff fanned out to determine who holds this $3.2 trillion in leveraged loans and CLOs. They pieced together data from central banks, Bloomberg Finance, S&P global Market Intelligence, Morningstar, the National Association of Insurance Commissioners, the Securities Industry and Financial Markets Association, FCA Alternative Investment Fund Managers Directive, the SEC, public disclosures by asset managers, banks, and pensions funds, etc.

It wasn’t easy to break through the murk of leveraged loans and CLOs.

The big thing that we always assume is that leveraged loans and CLOs are largely held by investors rather than banks, and that banks are not heavily exposed to leveraged loans, and that bank balance sheets are largely immune to a potential meltdown of those instruments, and that it would be investors that would get hit by the losses, and that banks would get away with just a few contusions, so to speak.

But now we can throw these assumptions out.

According to the BOE, 57% of the $3.2 trillion in leveraged loans and CLOs are held by banks. That’s $1.8 trillion.

Banks end up exposed to these instruments in three ways:

  • Loans that banks have originated but not yet sloughed off to investors (“pipeline exposure”). This was an issue during the Financial Crisis, when banks got stuck with those loans that then blew up. But this “pipeline exposure” is not included in the total bank exposure here.
  • Loans they choose to hang on to.
  • CLO holdings.

Of those banks that hold CLOs and leveraged loans, Japanese banks have become infamous after the Japanese government got worried about it. But turns out, they’re just small fry. They held no leveraged loans at the end of 2018 and held only $96 billion of CLOs (though they might have added to that stash recently).

European banks held $448 billion in leveraged loans and $32 billion in CLOs.

US banks (and “other global banks”) are by far the largest holders, with $1.06 trillion in leveraged loans and $160 billion in CLOs, for a total of $1.22 trillion.

The table shows all holders, including the $224 billion held by unknown holders, (“unallocated”). All amounts in billions of dollars. Loan funds for retail investors – the three lines: open-ended funds, ETFs, and closed end funds – combined hold $416 billion, making fund investors, in aggregate, the second largest holders. Those are mostly retail investors. Hedge funds are the third largest holders. Remember that “pipeline exposure” is not included. (If your smartphone clips the table, hold the device in landscape position):

Holder of Leveraged Loan or CLO Loans, $ billions CLOs, $ billions Total, $ billions
US & other global banks 1,056 160 1,216
European Banks 448 32 480
Japanese banks 0 96 96
Insurers 96 160 256
Hedge funds 256 96 352
SMA (separately managed account) 64 0 64
Open-ended funds 256 32 288
ETF 32 0 32
Closed-ended funds 96 0 96
Other non-banks 0 64 64
Unallocated 96 128 224
CLO managers 0 32 32
Total 2,400 800 3,200

It’s fascinating how murky the data is around this $3.2 trillion pile of leveraged loans and CLOs. And the BOE is not shy about pointing it out, such as:

  • “Complete data are not available for some non-banks, and so values have been estimated based on partial data.”
  • “The grey segment [“unallocated” = $224 billion] marks the areas of most uncertainty”.
  • “For hedge fund holdings of leveraged loans and CLOs, we scale up holdings reported to UK authorities by non-EEA managed alternative investment funds to reflect the size of the global hedge fund universe. This means these estimates are particularly uncertain.”
  • “Data for insurers largely refers to US entities. A proportion of holdings are through products that are offered by insurers to outside investors.”

The BOE’s efforts to shed light on leveraged loans has at least succeeded in revealing just how much murk there is in this end of the industry. And it is doing away with the illusion that banks are mostly off the hook when leveraged loans and CLOs blow up.

Kudos to the private equity firm. These things don’t happen overnight for companies. They happen overnight only for investors. Read…  Everything’s Fine Until Suddenly it Isn’t: How a “Leveraged Loan” Blows Up

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  90 comments for “Who Holds the $3.2 Trillion in “Leveraged Loans” and CLOs?

  1. Sandu says:

    Great info again! Thanks Wolf. In the last few years ABS (asset backed securities) based on sub prime auto loans have been issued by a bunch of non-bank entities. These entities many times finance these investments with loans received from banks. So banks have exposure to that market through those intermediaries.

    I wonder if there is some some similar type of additional banks’ exposure to CLOs/Leverage Loans through this mechanism.

    I worked for the largest SEC regulated derivates market clearing house back in 2007-2009. Soon after that there was a big push to bring many of the problematic instruments from that era into central clearinghouses to help address much of the murkiness you talk about here. There was some limited success.

    Now we’re back again into pilling more assets that are poorly understood and not properly risk managed into financial entities’ balance sheets.

    Neither Auto ABS nor the corporate CLO/Leveraged Loans/Junk Bonds are as big as the residential mortgage market. But when you add all of them up they might pose similar systemic risks, especially if the total of securities that will get into trouble will be comparable in size to the sub-prime mortgage market.

    • Iamafan says:

      Well you quit before September 2019 and 2020 when 100% of derivatives should be traded in Central Clearinghouses. UMR is an interesting read. I wonder what would happen? Will the government cave like the Fed recently?

      • sunny129 says:

        The usual ‘extend and pretend’ will go on, as long as they can!

        Look at DB! It shouldn’t be even listed!

    • OutLookingIn says:

      “some limited success”???

      This has flown under the radar.

      Back on Wednesday February 10, 2010 the Federal Reserve Board announced they had approved the ‘Depository Trust and Clearing Corporation’ application, to form a subsidiary of the Federal Reserve System. To be known as the “Warehouse Trust Company” responsible for over the counter derivatives, under the umbrella of the Trade Information Warehouse.

      Mission accomplished. Until the above was created, there was no way Wall Street could wash it’s hands of derivatives in case of default. Now an entity exists which has become a “dumping ground” for derivatives, that is part of the Federal Reserve System, and is back stopped by the government. Meaning? YOU the tax payer!

    • Mike says:

      Does any one else notice the similarities of these very, very risky investments with the securitized mortgages of 2000-2008, which caused the financial near collapse? It is always the same story.

      Guaranteed by their bribes (called political contributions thanks to the Citizens United decision of our corrupt supreme court {the “Supremes”}), the banksters get their cronies to give high ratings to junk. Then, because pension funds and other “dumb money” is always chasing after yield, and the banksters can fake such yields with the junk that they sell, the banksters can make billions of profits from selling the junk.

      They also get the processing charges and fees from creating the junk and sell it at a premium. The junk then later collapses and becomes worthless. If the banksters have not managed to get all the junk off their books into the hands of dumb money, they get burned too.

      However, since they own the politicians (particularly Republicans and some Republicrats), they get bailed out. No problem and lets look for the next way to defraud the dumb money.

      The amazing thing as how truly dumb the American people are for falling for the same con again and again and again. Do people not realize that their retirement investments/savings were and are being cannibalized by the banksters.

      Your pension will be worthless, because the banksters have caused the entity that they control, the Fed, to give them low interest rates to get them free money (called “recapitalize”) after they became insolvent due to their defrauding of the dumb money through securitized mortgages. Now, you will have to bail them out again from losses sustained if their fraud schemes using these CLOs, etc., again burn them.

      Here it comes again.

    • Joe Average says:

      Having personal, current, insight into the types of ABS loans that are actually being put on the books right now at a “Shadow Bank” entity in the USA. Let’s say a lender who does both subprime unsecured and secured ending with a preference to “secured” but will literally let anyone with a half decent heartbeat and a mildly provable income…. If you try hard you can narrow down my employer to one of a handful who are a publicly traded company….

      Point here is for this time period we (as a company) are actively trying to convince investors we are shifting to “secured” lending while simultaneously cooking the book on what “secured” means by giving out loans at 500x LTV (example: a 16000 “secured” loan with a 2001 Toyota Camry with 300,000 miles as security) and acting like it’s all well and good and our C-level management on the latest conf call talking about how our shift to Secured is really positioning us for the future.

      Reality is it’s all crumbling around the seams. People are dropping off their “collateral” to us on a almost daily basis now and the worm hasn’t even really turned yet.

      From my point of view if you lend “subprime” you get “subprime results”– doesn’t matter how you dress it up for public consumption.

      Caveat Emptor.

  2. David Hall says:

    The Fed warned about risks to the economy from increased lending to companies with subprime (below investment grade) credit ratings. Some of these companies may be paying large dividends, large cash and/or stock incentives to management, and buying back shares. If the economy will slow and company revenues fall, making payments on these debts might become impossible.

    • OutLookingIn says:

      Debt repayment impossible.

      Currently the cross-asset correlations are near multi-year extremes. Since ALL debt is asset based, this correlation is all-encompassing.
      There is over $13 trillion of negative yielding debt worldwide.
      Case in point:
      P.I.K. notes (bonds) – Payment In Kind. (aka: toggle bonds)
      Allows interest payment deferrals.
      Allows coupon payments with more debt. Meaning – Bonds that allow interest to be paid with still more bonds! Payment in kind.
      Debt piled on debt, piled on still more debt. Ad infinitum
      There is no liquidity crisis. There is a collateral crisis.
      The assets supporting the debt are no longer worth the loan balances.

      • d says:

        “The assets supporting the debt are no longer worth the loan balances.”

        When the margin between collateral and debt becomes lucratively profitable, is when peopel with their asses covered, start walking on debt’s.

    • Mike says:

      The Fed always has to cover its behind by “warning” of risks being incurred by its banksters. However, it intervened with regulators and has tried to prevent its banksters from being regulated.

      It would easily deny banks access to its ultra low loans, i.e., subsidies, or require them to increase their capital reserves when engaging in risky gambling, as in derivatives. It does not, because it covertly always has had the policy of first helping its banksters defraud the American people.

      That is its core goal. So many Americans have given up on trying to find jobs or full time jobs that its claimed policy to try to promote full employment has clearly been thrown out the window in favor of helping its darling banksters by miscounting the true unemployment and underemployment.

      We should amend the constitution to allow bills of attainder against the banksters and all Federal reserve members and directors. Instead of allowing all depositors to lose their savings, we should cause all control groups (i.e., the banksters) and the Federal Reserve directors, who are their enablers, to forfeit ALL of their assets without any exemptions.

      Check the crazy Dodd Frank Act, which the banksters caused the corrupt to enact. Next time the collapse happens, your savings will be used to bail out the banksters through bail ins. Of course, that will not be enough.

      Piercing of the corporate veil occurs with many companies that are run much less recklessly than the banksters run our banks. Why should that not be used instead to bail out the banks? The Dodd Frank Act was enacted not to “reform” banks (Ha, Ha, Ha) but to avoid the risk of the piercing of the corporate veil if investors later sued and to protect the banks’ control groups: the banksters.

      I find the comment about the “highest quality” corporate loans that banks make hilarious. We are not all crying tears if the banksters do not maximize their profits by making risky, effectively taxpayer-guaranteed loans.

      The problem with leveraged loans now is that the corporations are using them to pay out huge dividends, etc. The banks do no t restrict that. Thus, the corporations become less and less able to meet their obligations.

      When the collapse/recession comes, since the corporations did not use the loans to invest in research or build factories, etc., they cannot meet their obligations. The security becomes worthless if too many of those commercial real properties, etc., are being sold to meet these obligations. That is the problem with CLOs. They are not being used to enhance the wealth of these corporations but to divest them of such wealth in increase their leverage and risk.

      • Winston says:

        There is one simple way to personally put an admittedly tiny knife in the side of the parasitic financialization game – don’t play their game. Get out of DEBT and as much as possible STAY out of debt.

  3. Rob says:

    What is the point of this article? Have you looked at the BoE stress tests and how onerous they are? The banks are running 16% tier 1 CET and 20% Total capital and have to maintain 8% plus a systemic risk buffer of 1 or 2% after a GFC type stress test. The stress test even includes charges for regulator fines… big ones.
    Leveraged loans are the highest quality corporate loans the banks make after real estate backed and sovereign debt.
    If you want to look for bagholders when inflation breaks out, its the pension funds… and home owners. And USD holders from overseas.
    The track record of CLOs on a hold to maturity basis is actually very good, the reason being the relatively low default rate and high recoveried of loans, about 3% PD and 20% LGD. Those numbers are expected to be worse in the next default cycle however.


    • Iamafan says:

      Statistically most Wall Streeters and Rating Agencies did not believe Lehman and Bear would fall either. But there are fat tails, right?
      This article points the risk of that happening.
      I think those with skin in the game, your own real money bet, are probably escaping. Playing with OPM, maybe not so.

      • Wander Lust says:

        Ya know what they say about statistics.

        The problem with the fat tail argument (statistically anyway) is if you actually look at the standard deviations across credit spreads (drilling down to industry level) during the GFC is that you have to accept that the market is a non-normal distribution.

        If you assume a normal distribution pattern, a meltdown of the GFC magnitude should not have been possible – statistically speaking.

    • Lance Manly says:

      >after real estate backed and sovereign debt

      CRE loans have their own issues https://wolfstreet.com/2018/10/25/is-the-feds-medicine-gradually-pricking-the-commercial-real-estate-bubble/

      Also note that the Architecture Billings Index new project inquiries hit a 10 year low. Makes me think developers are getting worried about vacancies in newly completed construction

      • Rob says:

        Under Basle III its hard for banks to lend more than 50% LTV. So yeah some retail is in trouble but apart from that it should be ok

    • jrmcdowell says:

      One of the points of the article, is that Central Banks should not be manipulating financial markets in such a way that there is such a stunning level of debt trading at negative yields. This phenomena creates a ripple effect throughout the economy that causes everything to be unduly inflated including stocks, housing, and the leveraged loan/junk bond market.

    • Wolf Richter says:


      #1: CLOs are only a smallish part — at $800 billion — in the leveraged loan universe of $3.2 trillion. The article was primarily about leveraged loans.

      #2: Absolutely NOTHING is risky right now. There are ZERO risks anywhere. That’s how everything is priced. Absolutely nothing can go wrong. Denial of risk is precisely how you sleepwalk into a financial crisis.

      • Iamafan says:

        I can feel the sarcasm all the way from California to New York. Cheers.

        Anyway I’m waiting for the 4-week announcement at 11am EST. More zero risk investing.

      • sunny129 says:

        Thank you W.R

        I used to think the leveraged loans were only 1.3 T until now!

        Do these 3.2 Trillions include the BBB rated Bonds also, or altogether they different category? Even 50% bonds at LQD is BBB rated?!

        My contribution to you early in the year is worth every penny! That’s your blog is a must read everyday, for me!

        • Wolf Richter says:

          “Do these 3.2 Trillions include the BBB rated Bonds also, or altogether they different category? Even 50% bonds at LQD is BBB rated?!”

          Loans are completely different from bonds, and no bonds are included in the $3.2 trillion of leveraged loans. Those are just loans — and most of them are non-investment-grade loans (“junk” rated).

      • Rob says:

        Wolf, with respect, au contraire. The question is who makes money and who holds the bag when the music stops. Why don’t you do an article on cash flow lending direct lending funds or PE LBO funds that the loans finance?

        • kiers says:

          @ ROB: The Economist: “Since 2012 non-financial corporations have used a combination of buy-backs and takeovers to retire roughly the same amount of equity as that which they have raised in new debt.”

          DIRECT QUOTE!

      • d says:

        “#2: Absolutely NOTHING is risky right now. There are ZERO risks anywhere. That’s how everything is priced. Absolutely nothing can go wrong. Denial of risk is precisely how you sleepwalk into a financial crisis.”

        should read

        #2: Absolutely NOTHING is risky right now. There are ZERO risks anywhere. That’s how everything is priced. Absolutely nothing can go wrong. Denial of risk is precisely how you sleepwalk into a MASSIVE financial crisis.

        Everything is several times bigger than it has been before, fueled with QE cash, the PBOC ECB are still printing overt and covertly, directly, (and particularly ccp china) indirectly.

        If it all goes at the same time, or goes domino, watch out, in a really big way.

        did the FEd go dove to placate the white house or did the ECB and PBOC force it to, by returning to deeper negative rates, and more printing.

  4. Iamafan says:

    Makes me wonder about who else will the banks lend to? If most of the Investment Grade companies are now at most rated BBB or near junk, the next borrowers are junk.

    With rates super low for ten years, the brain starts getting fooled and believes things are just great.

    Don’t worry, the debt limit deal is done. Now Uncle Sam will need all the cash that’s out there at less than 2%. New normal seen a few years back. Prepare.

    • Lance Manly says:

      The Treasury auctions are going to have to be huge to make up for all time using “extraordinary methods” along with the new debt for the increased spending. You have wonder how much it will take for the risk free government debt to choke off other fixed income. I see a “debt out the wazoo” article coming once the ink is dry.

      • Iamafan says:

        Have you seen the 13 week yield yesterday?
        When you bet your own money it ain’t just news. It hurts.

        I am think LIQUIDITY issues, I mean lack thereof, for a while. You can already see it in higher EFFR and SOFR above IOER. The amount of net issuance of Treasuries was actually negative last month and low this month. Check SIFMA for detail. So you are right, expect an avalanche coming, although Sept is going to be a very large SOMA add-on rollover month.

        • Iamafan says:

          According to *SIFMA.
          Net Raised Cash, US Treasury
          Feb-19 154.3B
          Mar-19 167.0B
          Apr-19 -63.9B !!!
          May-19 52.5B

          The last few 4-week issuance were only $35B instead of $60B per week (Mar 2019)
          The 13-week were $36B compared to $48B (Mar 2019).

          So you can see new Treasuries are going to be auctioned with a vengeance since the gates are now opened. The primary dealers will have to buy them when they are already swamped with inventory (see NY Fed weekly report on Primary Dealers). Interest will have to rise to soak up these new Treasury Issuance not unless the Fed (white knight) opens a new round of QE.

        • Wisdom Seeker says:

          @Iamafan –

          The Fed still shows Excess Reserves, so there ought to be room for Primary Dealers to sop up Treasury Issuance without rates having to rise, or the Fed having to print. As it is, the Fed is still unwinding balance sheet, selling not buying.

          They’ll hold rates on the short end. As for the long end, nudging long rates up could very well be a tacit policy goal. I bet the FOMC would love to clear the yield-curve inversion “warning flag” without sacrificing their limited supply of rate cuts above the zero bound.

    • Unamused says:

      Makes me wonder about who else will the banks lend to?

      They’re such nice guys, they’ll lend to anybody, so long as they get their fees and can offload the risk. They’re real people pleasers and want everybody to love them. And people do, the schmucks.

      As for risk, there really isn’t any. Past experience tells us that the biggest banks will be okay no matter what, and that’s the important thing. And if through some unforeseen circumstance things somehow go pear-shaped, well, they do appreciate your sacrifice. It’s for the greater good, just not yours.

      Some people would prefer less corruption, but they’re hopelessly outgunned by others who prefer better opportunities to participate in it. After all, honesty and hard work only pay off later, but laziness and deceit pay off now.

      I have trust issues because people have lying issues. The worst thing about finding out that you’ve been lied to is the realization that you are not worth the truth. People do not want to believe they are not worth the truth, and therefore they will believe lies.

      • NBay says:

        Slow tough, but good reading so far for me. Many re-reads from start. I hope you are right re: “As for risk…”, because all my meager savings is in a big bank CD’s and some TDirect.
        At coffee a regular was plumber at SF Fed Bldng. Said Judge Mueller was square shooter. Knowing how DC corrupts first hand from a corrupter relative, I hope he still is. Still, have to place mark this spot and get up in 4 1/2 hrs to see it all firsthand.

  5. mark says:

    Great typo : “Loans they choose to hang to.”

    Was this subliminal ? Ha perfect

    (Assuming you meant : “hang on to” ? )

  6. Mike Are says:

    Anything the banks hold will be backstopped by the Central Banks in a crisis. So that portion is a non-issue. The rest will also likely be backstopped but in a more delayed/convoluted manner.

    We live in a controlled/backstopped financial paradise, until the massive inflation brings it to ruin.

    • Yes but the amount of cross border backstopping remains doubtful. Fed has basically orphaned DB’s US operations, and with populists everywhere some of these liabilities may not be honored. If you want to be safe you should be in an all US bank. Or the other way around

  7. unit472 says:

    Perhaps off topic to leveraged loans and CLO but another murky area for banks and their customers is ‘hacking’.

    I recently began receiving unsolicited credit cards with my account number but another name on them. 7 in total from Chase and one from Capital One where I only maintained a CD account but no credit card account. My checking account at SunTrust also came under attack. Two payments, one for $975 and the other for $500 were made to a Goldman Sachs account. I do not nor have I have I ever done business with Goldman Sachs. SunTrust denied my claim of fraud and said that I was responsible for the charges even though I do not know what good or service I allegedly purchased or to whom the Goldman account belonged to.

    I have no credit cards/ debit cards i can use now, cannot access my accounts on line and had to move all my money out of checking to stop the looting. Problem is I, like many people, have money automatically deposited into my checking account and automatically debited each month but I can no longer monitor these transactions from my computer as the banks have locked my accounts. I have had to revert to using cash to conduct my business because the banks cannot or will not protect their customers.

    How widespread is this problem? I note Equifax (or was it Experian) is to be fined for losing their ‘customers’ data ( though I never agreed to them having it in the first place) and claims can be made against them but CNBC says your chances of recovery are small. I have appealed my case with SunTrust but would include this quote from the email they sent me.

    “You have the right to request a copy of any documents that were used in decisioning your claim”

    My experience in dealing with Transunion,Equifax and the fraud units at these banks is that you will deal with young woman for whom English is not their native tongue and to whom you must give all your secure financial info to over the phone. Since the banks KNOW the hackers are based abroad how secure would you feel giving such information to a low paid foreigner purporting to represent the biggest financial organizations in America?

    • Wisdom Seeker says:

      Yikes! I’m not an expert but I do have a bleeding heart. Here are some ideas:

      Sounds like you want to engage some legal advice regarding SunTrust. One would think that if your name is not on the card, and they can’t produce a document showing you cosigned another person onto the account, then they shouldn’t be able to take you hostage. I’m not a lawyer but I’d be tempted to try claiming that for all you know, the fraud originated internally within their bank (as it did recently with all the fake accounts at Wells Fargo). If you can credibly threaten to take the case to court, maybe you can force some discovery? But you have to make sure it’s not a corrupt jurisdiction…

      Also, there is, or at least used to be, a federal reporting line for issues such as this. That might help.

      Looking past the crime, to personal survival, you’ll need a safe place to park your paychecks. If your bank has locked your accounts you need a new account, and the odds are good that the dispute has messed up your credit score, so the national you’re-just-a-number-to-us banks may not want to be very helpful to you right now. A smaller, local outfit willing to look at you as a person might be a better bet. Could be a credit union as well as a bank. If your value to your employer is high enough and they will vouch for you, that might help too.

      What was your credit score like before the shenanigans began? If you have a paper trail of clean credit for many years, that would help you make your case.

      At the new bank or credit union, do not get any credit products, credit cards etc. Just get the checking account. Then you could buy “burner” pre-paid debit/credit cards, only for purchases you can’t make with checks or cash. This would limit your liability in the event of future harassment.

      You will not want to get assistance from family members or friends (no shared accounts) until you know how you were hacked. For starters, a lot of ID theft is perpetrated by friends/family! But worse, if the criminals have your birthday and SSN they could use those to go after you again – and now your family or friend is also exposed. But if all the criminals know is username, password and account numbers, you can at least change those by walking to a different institution. But make sure you have a unique password for each institution!

    • Cashboy says:

      I am an accountant with an accountancy practice for Small SME’s in the UK.

      Nobody should ever trade as a sole trader; only as a limited company.
      I actually recommend my clients never bank cash. That they should always draw cash out of the bank, leaving next to nothing in the account. They should pay everything with cash when possible. This solves a lot of possible problems and gives you control of your position and gives you the ability for what I term “flexibility”.

  8. Lhirsh says:

    So..on top of 700 trillion in interest rate swaps and who knows how many trillions in the CDS market, we have a mere 1.3 trillion in a slightly less leveraged loan environment. Well…..like a decade ago, the FED can cut rates back to zero to save twenty banks at the expense of the entire class of people known as senior citizens. Where are retired people supposed to find purchasing power in an environment like this one? It’s not just purchasing power. Insurance companies started making retired people resume payments on polices that the holders thought were either “paid up” or would have dividends high enough to cover future payments. The policies couldn’t earn enough money to ensure that status going forward. That, my friends, is a proverbial double whammy.

    • RD Blakeslee says:

      “Where are retired people supposed to find purchasing power in an environment like this one?”

      Physical precious metal squirreled away over the years? Land with harvestable timber, growing over the years?

    • Unamused says:

      Where are retired people supposed to find purchasing power in an environment like this one?

      Okay, let’s pretend that matters.

      • Lhirsh says:

        Oh….Purchasing power does matter. They’re are a bunch of younger retired people out there. Collectively, they’re called “consumers”.

  9. QQQBall says:

    Regardless of the loan type, the system is rotten. You originate, package and sell, and maybe retain servicing. The same idjits that were buying subprime rated AAA are still active. The hazard wasn’t just not punishing the guilty, the real moral hazard is that after a while, you see everyone rolling in dough and you feel like a dope.

  10. GSW says:

    Great stuff. Regarding banks exposure, it is indeed hard to parse through the market. Bottom line, there is a desperate search for any yielding paper, and it’s reflected in the frothiness of the current market.

    Wolf: Without getting too much in the weeds/jargon, how are one stops/Unitranches classified? (A Unitranche is one secured loan to a borrower, but acts like a senior/mezz concept). Usually banks hold the safest first-out piece and institutions hold the riskier, higher coupon last-out piece, but I think the whole thing is classified as a leveraged loan. They are all the rage now, especially in the middle market, so does the bank have to report it as a lev loan, but they are really only holding the (theoretically) safest piece? It’s murky.

    Also, banks are definitely providing the leverage for CLO vehicles, but it’s done in a borrowing base concept; so as an underlying loan struggles/get downgraded they are pulled out of the collateral pool to lever against (sound familiar?). Again, theoretically, banks are better protected due to portfolio theory, compared to making a single leveraged loan to one company. But does it still count as a leveraged loan?

    Not trying to come off as a defender of banks, but they have been losing material market share in lev fin to unregulated entities. If a repeat of ’09 happens and banks aren’t better-capitalized, they’ll never learn. I guess we just need some sort of meltdown to show who has been out over their skis….

    • Iamafan says:

      I’ve asked myself a similar question because I was thinking of buying the SENIOR LOAN ETFs. But after I read the analyst works from S&P, Invesco, Credit Suisse, and Guggenheim, I felt very uncomfortable with the EXTRAPOLATION of the numbers. I didn’t buy.

      Just my opinion. I guess we will TEST their theories during the next recession.

  11. medial axis says:

    Over here in the UK (and now in the US I believe) is Funding Circle and other peer-to-peer lenders. They act as intermediaries between savers/investors and borrowers – thus no leverage. How safe are they? Seems to me their business model is far safer than banks, as they have no leverage. I’m getting about 5.5% with Funding Circle. Only a small amount invested and have to wait to withdraw funds.

    They are not covered by the FSCS (called deposit guarantee in the US, I think?). That banks are covered by FSCS is, imo, a distortion of the (so called) free market. It certainly distorts my decision. I keep most of my (small amount of) fiat in a bank but get naff all for it. In fact I’m likely losing out to inflation but, like many of the 99%, I’m just trying to minimise the erosion of my capital! Still, I diversified into bitcoin in 2014 so I’m still above water.

    • Wolf Richter says:

      medial axis,

      Peer-to-peer lenders totally blew up in China, where they had been all the rage until they blew up. Took lots of investor (savers) money down with them and led to street protests and government action.


      I understand that your peer-to-peer lender won’t do this to you, but the Chinese savers had the same understanding.

      • medial axis says:

        According to the link it seems a lot of peer-to-peer loans in China were to retail borrowers. seems much was spent on buying cars, with a subsequent collapse when it all when pear shaped.

        AIUI, Funding Circle(FC) lends to small to medium sized businesses, not retail (other peer-to-peer lenders might do so). It used to be that you could pick the firms your money was lent to but that’s no longer the case. You could also ask borrowers questions, I don’t know if that’s still possible (but seems a bit pointless if you cannot choose who you lend to).

        As for FC going to the wall, I’m quite aware it’s a possibility and take that into account when deciding how much to invest with them. So there’s a possibility I could lose out in the long run[1]. With a bank, of course, it’s not a possibility I could lose out in the long run but more like a certainty.

        But by far my best investment has not been in fiat and I expect that will remain the case – by a long shot.

        [1] Although the chances I do are tending to zero as my total returns are very near the total I now have invested with them.

    • Cashboy says:

      Medial Axis:

      5.5% interest sounds excellent in these times.

      The Funding Circle has no problem paying out while more people are plowing their capital in.
      The problem usually occurs when nobody invests investors ask for their capital back.

      • medial axis says:

        I’m pretty sure FC doesn’t work the way you suggest. I can see which businesses my money has been loaned to, how much and the ongoing repayments (or lack of). So, in the extreme case, if all (167) of the firms I’ve loaned to go to the wall then I lose out massively but FC only lose the fees they would have earned had the firms repaid their loans . So the model is not a Ponzi (as you suggest). Also FC is regulated by the FCA.

        Yes, 5.5% is high but it used to be higher[1] and is slowly dropping. I don’t know if the drop is due to more defaults or the fact I’m slowly withdrawing some of my capital. You cannot get your capital back on demand but then you know that’s the case when you first invest (if you read the blurb). I’ve just had a look at their UK site[2]. At the bottom of the page, aimed at (UK) investors, it states pretty clearly how to access (withdraw) your funds.: (1) Turn off reinvesting and withdraw as repayments as they come in or (2) sell your loans to others.

        [1] You can chose the risk band to lend at. Higher risk for higher return, as usual. I opted for middle of the road.

        [2] Would post a link but it’s pretty easy to DuckDuckGo “funding circle” and it turns up at top of the list of hits (and I don’t wish to break Wolf’s rules).

    • Drehscheibe says:

      Did you consider how BRExit is going to impact British SME’s ? Just curious.

  12. Senecas Cliff says:

    Wolf, How large is the total amount of these leveraged loans turned in to CLO’s compared to the amount of Subprime Mortgages turned in to CLO’s ( or the equivalent if I have my acronyms wrong. ) One of the other things I remember from the mortgage crisis was that the Loan Tranche the banks kept for themselves was usually the riskiest because of the high returns, then they would try and mitigate the risk with derivatives. Will be a bad day if these loans collapse and they find out Deutsche is the main counter-party for their derivatives.

    • Iamafan says:

      In a recent article with Sheila Bair, this was mentioned:

      A leveraged-lending bust could hit economy quicker than subprime blowup, says ex-FDIC boss Sheila Bair. She probably knows just as good as anyone.

      The amount of leveraged loans outstanding globally stood at $2.2 trillion as of 2018, according to a Bank of England report published in January. That was nearly double the size of the U.S. subprime mortgage market in 2006.

    • Petunia says:

      What I remember is they keep what they can’t sell. Their aim is to unload every deal, make the money, do another one.

    • Wolf Richter says:

      Mortgages are larger. In the US alone, residential mortgages amounted to about $10 trillion (not counting commercial real state mortgages). About a quarter of that was rated subprime. These numbers here of leveraged loans are global numbers.

    • d says:

      “Will be a bad day if these loans collapse and they find out Deutsche is the main counter-party for their derivatives.”

      Especially as those derivatives are being/have been hived off into a separate unit aka bad bank with no capital.

      This appears to be part fo the current DB restructuring process..

  13. Unamused says:

    The BOE’s efforts to shed light on leveraged loans has at least succeeded in revealing just how much murk there is in this end of the industry.

    Not exactly. It tells you there is a lot of murk. It can’t tell you how much more murk you can’t see is hidden by the murk you can.

    Q: How far down does the rabbit hole go?
    A: All the way to the bottom.

  14. Old Tom says:

    “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered” — Thomas Jefferson

    • Unamused says:

      “Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains. I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial by strength, and bid defiance to the laws of our country.” – Thomas Jefferson

      That battle was lost 200 years ago.

      The class war is over. It was lost long before you were born.

  15. Karl says:

    I notice that every number in the table is an integer multiple of 32. This is strange looking data to say the least, and therefore hard to believe. What’s up with this?

    • Wolf Richter says:

      Excellent observation in terms of 32. This data comes from a rectangle filled with 100 little squares where each square denotes 1% of $3.2 trillion, or $32 billion. I just did the math for you.

      • NBay says:

        Ok, now I have to dump scaled & labeled numbers first screenshot in WS ref folder and replace it with this. Guess I like colors?

        Re: Kudos to PE, above. Not sure how you meant it, but sarc was my take.

        But you know, with all this PE, public stocks on the decline, (another good chart I can’t find) and probably well over $100 T net household wealth in USA by now, I’d sure like an article on where it all is, PE has to be some of it. I assume since this is Fed data that they are “ignoring” all the City of London, etc, stashes, since they likely don’t know (or care?) about any of it (just my assumption), but it might really shed light on the scope this whole PE thing better, and PE really scares me.

        Also, you’ve shown clearly how the “pirate” PE types like Lambert operate, but another disturbing stat (from memory only) was a chart showing top food producers in the world by sales (Nestle, Carlyle, ADM, etc) Anyway of the top 10, only #’s 3,5, & 7 were public, IIRC. That is also scary to me. Bottom line, no or very little little guy investing access OR regulation? Hope my notions are all wet.

      • kiers says:

        WOW! what a post! Exactly the kind of straight info you WILL NOT find in the slanted FT/WSJ.

  16. Ididsa says:

    “But investors have the hots for them all over the world. With about $13 trillion of global investment-grade debt trading at negative yields, thanks to idiotic central-bank policies focused on financial repression rather than a sound economy, institutional investors have to take on huge risks to get a little yield, and these leveraged loans and CLOs fit that bill perfectly.”

    Well said. What’s irritating is that the central banks persistently publish their financial stability reports that lament about the vast amounts of low credit quality debt proliferating throughout the global financial system, yet they continue to foster the very demand for such debt by continuing to artificially suppress interest rates.

    They do this through their incessant reckless public signaling (Williams, for example), their caving into (the Administration’s) political whims and agendas, and most recently by signaling (several) FFR rate cuts, all under the guise of misguided “new” theories about inflation, deflation and disinflation.

    It’s such hypocrisy.

    • Unamused says:

      Hypocrisy is immensely profitable and is a proven election winner. Hence its universal popularity.

  17. raxadian says:

    So here is how the next crisis will explode then…

    Should I be scared?

    • Wolf Richter says:

      No. Make sure, as a pedestrian, you don’t get run over by a car in SF — that’s what I’m worried about. Walking around in SF traffic has become a deadly activity. It can kill you. Leveraged loans don’t kill you. I’m not “scared” of that kind of financial stuff.

      • That’s because they never prosecute the drivers, and apparently the civil court system is too slow, and the victims too poor. Same in SD, if you are a hit and run victim you have a better chance as a dog. Someone will stop for you, you get free medical care, and they find you a new family.

        • kiers says:

          LOL: +1; Reminds me of “Wall Street” (the movie): “Thing about WASPS…they hate people, they love animals”

      • raxadian says:

        Great, now I am even more scared of stupid self driving cars, thanks a lot wolf!

        And in the last huge economic crisis around here, people literally died because they didn’t have money to pay hospital bills or because they had heart attacks.

        So yes, losing money can kill you.

  18. John Taylor says:

    “With about $13 trillion of global investment-grade debt trading at negative yields, thanks to idiotic central-bank policies focused on financial repression rather than a sound economy…”

    I love your wording here, so matter of fact. Unfortunately your sentiment is still drowned out by our Wall Street owners with their endless cries for more rate cuts and QE. Still, it’s refreshing to see some calls for common sense out there.

  19. Phoneix_Ikki says:

    Hey Wolf, came across this article which kind of goes against what you are saying here, especially around CLO. Curious to see what you think of this? Is it all sunshine and rainbow like this writer is saying?

    Leveraged loan default rates are a third of the historical average — not a third of crisis levels, but of the long-run average, Standard & Poor’s says. This resembles junk bonds in 2015, not mortgages in 2007.


    • Wolf Richter says:

      Yeah, that article with the click-bait headline circled around a lot. I didn’t read it, given the garbage headline. But I don’t expect a huge crash either. But I expect losses.

      Here is the thing: the leveraged loan phenomenon of the current magnitude is new. Leveraged loans have been around for a long time, but now they’re huge, and they are super loosey-goosey, and to look at current default rates – today when practically NOTHING is defaulting because of the flood of money that is chasing yield is still funding everything and is preventing defaults – is like pulling a bag over your own head.

      I look at leveraged loan default data all the time. Yes, they’re low now, but they’re low because the financial conditions are extremely loose. That’s the only reason they’re low. Those financial conditions can tighten up on a dime – or even just go back to normal. And then you get defaults.

      Once you get defaults, this is when you will find out that instead of 60% recovery on a leveraged loan, you might only get 25%, and that the loss is 75%, because it was a cov-lite loan, and the collateral got moved out of your reach, etc. So once defaults start, the losses will be far higher than historical levels. That much is already guaranteed.

      • Phoenix_Ikki says:

        Thanks Wolf. I tend to agree with your assessment. With your observation and data I feel that we’re definitely in uncharted territory when it comes to this market. We can argue if and when the next big crash or correction is coming soon but most of us see that coming with all the data out there. I just find it funny and not all that surprising there’s still many articles like the one I linked out there still painting a rainbow and sunshine pictures, I guess it’s a easy way to sell to the masses and keep the charade going just a little longer.

  20. HR01 says:


    Many thanks for the piece. Appreciate the coverage.

    CLO’s are weird critters. Know just enough about them to stay away.

    A CLO contains tranches of debt and equity. The equity pieces are typically the highest risk (but also provide the highest potential returns).

    The last time we saw a crisis with CLO’S was in late 2015 into early 2016. Prices got crushed (50 to 60 cents on the dollar) but no margin calls were issued. Started with energy loans but since the Fed ordered banks not to foreclose, this gave the green light to pensions and funds that the Fed had their backs so they bought with both hands.

    Business Development Companies (BDC’s), which are a favorite with retail investors, have long been buyers of CLO’s but many funds scaled back after the 2015-2016 crisis.

    The real risk with CLO’s is embedded leverage (perhaps as much as ten-to-one). When any attempt is made to tally the dollar amount outstanding, count on it being some multiple larger due to the leverage employed.

  21. Cashboy says:

    Does it not occur to anyone that there are so many financial instruments being created with all these acronyms ?

    And that people are being paid to create and market them.

    Imagine if we lived in a world with no credit and debt.

    • d says:

      “Imagine if we lived in a world with no credit and debt.”

      That would be even more horrible than the world we live in know, or the world we will live in when this mess implodes.

      Credit and Debt, PRUDENT non Predatory, Debt. Are an integral part of modern business. Pre Athens.

  22. Iamafan says:

    Wolf, I think you can write an article that clarifies some of the confusion here.

    I think may readers are not clear between what a leveraged loan (the loan itself) is versus what a CLO is (an SPV which has a pool of leveraged loans) sold in tranches where the payment stream is the collateral, versus funds or ETFs (that are wrappers) for a pool of investors (including retail) which are invested in leveraged loans. (I avoided the synthetic ones.)

    Many for us readers here, I suppose, only have money to buy into the funds and ETF retail levels, whereas our pension retirement and insurance funds have a lot of money and can buy a loan itself or even be part of a syndicate that made the loan.

    I understand that leveraged loans are now are more than 2.3T while CLOs are about 700b. I am not sure of my numbers. But the real question is, for RETAIL investors, what are the risks when a fund or ETF has 300-600 of these loans in a pot? If a few explode, what happens? Do people run for the exit and make transparency and liquidity disappear for a while?

    • GSW says:

      One person’s opinion: It’s a valid question.

      The ETF angle is new and has not been tested in a downturn – I think retail investors buying into a leveraged loan ETF (probably seduced by a yield) need to really do their homework and see what they’re buying.

      With BDCs/CLOs, the publicly traded vehicle is the managing vehicle for the associated CLO funds and is usually the equity (lowest on the priority), so if you are buying that stock you are betting that the collateral associated with all of the vehicles they manage is sound enough to cover their individual ratios and promised returns, with sufficient dividends left for the equity manager.

      The thing is, once a waterfall starts, it happens quickly. Moody’s downgrades one of the loans that is being used to as collateral for a tranche of ‘safer’ A debt, for instance – so that comes out of the borrowing base for the A tranche and either needs to be backfilled with a higher quality loan (to maintain the borrowing capacity on their bank lines) or sold (at a discount if the loan has just been downgraded) and the entire deck gets shuffled. If a big event happens and lots of loans are getting downgraded at once, all of the CLO vehicles need to reassess their collateral pools to stay in compliance with their own individual operating ratios. The publicly traded entity also has to maintain a certain price in order to keep from the banks calling their warehouse lines; so as the loans weaken, it ripples all the way through the system and can happen pretty quickly. The BDC stock you purchase can evaporate because anything that has value or current interest payments needs to be kicked up the priority ladder to the A B C investors. And the equity piece is all of the residual holdings. It’s not as easy as “well look at this dividend yield!”. That dividend is only there as long as the underlying borrowers aren’t in default and can make their interest payments.

      This market used to be fairly simple to understand; it is evolving constantly now with “creative” loans, loose structures, and new players. I think the average retail investor (average investor, not every investor) doesn’t do nearly the diligence on this asset class to realize the risk. We don’t know what will happen in a fund or ETF when fireworks start flying re: liquidity. Not saying avoid it; just realize that it’s a complex asset class.

      • HR01 says:


        Good points.

        Investors are likely oblivious to the fact that what’s driving the attractive dividend yield of these BDC’s and ETF’s is leverage. Lots of it. They don’t know it’s there and don’t care as long as those quarterly (or monthly) dividend payments keep ringing the register.

        Investors likely unaware of the many loans out there with PIK toggles. These should be illegal as it allows those in default to pretend they are not.

        Once they system hiccups, as you have so clearly stated above, the trouble can escalate rapidly. Return of principle then suddenly becomes all that matters.

        Credit ETF’s may be the asset class that triggers the worst damage whenever the next credit crisis unfolds. Duration mismatch is a killer when liquidity disappears.

      • Wander Lust says:

        Recent research by Jane Street “Credit ETF Trading in Stressed Markets”

  23. Kiers says:

    The Economist: “Since 2012 non-financial corporations have used a combination of buy-backs and takeovers to retire roughly the same amount of equity as that which they have raised in new debt.”


  24. Iamafan says:

    Factoid: Many of the CLOs are actually SPVs formed in the Cayman Islands.
    Good luck with that. Don’t believe me? Read the FRB’s article:


Comments are closed.