CLOs Face Key Risk as UK Pension Plans Are Dumping Them

UK pensions are offloading collateralized loan obligations as the nation’s bond markets plummet, and at least some investors fear CLO prices could fall further because of a key risk embedded in the securities.

CLO managers take portfolios of leveraged loans and package them into bonds. The risk in the resulting securities stems from a guideline that can constrain these asset managers: less than 7.5% of their portfolio should be rated in the CCC tier, the lowest grades of debt that commonly trade in the market.

If they exceed that level, asset managers often have to cut off payments to holders ...