CLOs

Direct lenders around the world are talking with borrowers about easing interest payments, waiving penalties and relaxing covenants as they assess the growing damage to their portfolios caused by the coronavirus pandemic.

The amount of distressed debt in the U.S. has quadrupled in less than a week to nearly $1 trillion, reaching levels not seen since 2008 as the collapse of oil prices and fallout from the coronavirus shutters entire industries across the globe.

Dramatic Fed intervention may steady some markets, but unless something changes — and, judging by the last two weeks, it very well could — the central bank won’t be there to save fallen angels. Which brave investors will step up?

Red flags and warning signs from February should have prompted investors to make “all the wise decisions" at that time, says Ville Talasmaki of Finnish financial group Sampo Oyj.

One option could be issuing an announcement that makes clear regulators won’t likely object to risky funding arrangements that they’ve previously frowned upon, said the person who requested anonymity because the discussions might not lead to any actions.

Oaktree Capital Management LLC is planning a new distressed debt fund as recent credit market turmoil throws up investment opportunities.

While collapsing market prices do not present immediate worries for CLO managers, the prospect of future downgrades and defaults becomes more problematic.

Prices for major term loans issued by operators such as Marriott International, Hilton Worldwide and Caesars Entertainment have fallen in recent weeks as investors grow worried about the impact of the COVID-19 outbreak on global tourist and business travel.

Banks may be protected from a direct hit, but they have invested in vehicles that include such loans, potentially exposing them to defaults.

If JPMorgan, Credit Suisse and Macquarie Group aren’t able to find enough takers of bonds and loans funding El Dorado Resorts' acquisition of Caesar's Entertainment, they may have little choice but to offer the debt at a steep discount.