CLO Credit Bubble Narrative

The press and a number of academics have been making hay recently regarding the supposed credit bubble forming in leveraged loans and CLOs. Personally, I don't buy it. Having been on the issuer side of the leveraged lending equation, my view is that the underwriting standards are pretty high, even if terms have gotten more borrower friendly over the past several years.

The comparisons to private label MBS CDOs seem kind of ridiculous to me for a few reasons. The collateral quality is much more transparent given the limited number of loans in each vehicle and the fact that the originators are more sophisticated and responsible than some crappy mortgage broker. Moreover, the managers are generally AMs who have to care about investment performance rather than some IB who just wants to move product. The new risk retention rules should create skin in the game and keep people honest. The systemic risks should also be less severe due to the lack of inherent liquidity mismatch.

I'm no expert on this subject, so would be interested to hear from the credit folks whether or not you agree with my thoughts above.