CLOs in Hypergrowth Mode, but LIBOR Transition a Near-Term Challenge

Abstract

After displaying resilience during the initial phase of the pandemic (in 2Q20) and recording stellar performance since 3Q20, the collateralized loan obligation (CLO) market has gained significant credibility, crossing the USD1tn size mark and experiencing widespread participation. Corporate earnings rebounded strongly after 2Q20 and are expected to continue to grow in 2022. However, there are a number of macro and industry-specific headwinds to watch out for. The CLO market also faces its next major challenge of transitioning away from the London interbank offered rate (LIBOR) regime. Although the newly mandated base rates resolve the issues LIBOR regulators wanted to correct, they bring a whole new set of challenges for the market. This article explores the current CLO market landscape, outlook for 2022, key macro challenges facing the market, LIBOR transition problem, and role of each participant in ensuring a smooth LIBOR transition.