Is the CLO market in danger?

Genuine question here: Is the CLO market the next ticking time bomb in the financial system?

To better explain my question, the CLO market over the past few years has EXPLODED in volume. Originators were issuing highly leverage loans and historically low-interest rates to anyone with a decent "Value-Add" business plan. Why? The philosophy that real estate always increases in value. 

Anyone in commercial real estate has faired well over the past 14 years. Many MF syndicate acquisition groups have been taking advantage of high leverage at a low cost in order to juice their returns. But what happens in a rising interest rate environment where the refinance sizing doesn't cover their original loan balance? Liquidation or the calling of more equity to the deal.  

Many of these bridge deals will likely come due in the next year or two and will have to pay off their high-levered debt. In the event that rates keep increasing and the "Market value" of these assets simmer/dip due to loan sizing constraints, could we see these groups default on their loans causing a similar meltdown to '08?

I know there have been multiple protocols put in place since the '08 crisis but the fundamentals of the CLO market are similar. With many bridge lenders pulling out of the market, it makes me wonder just how "frothy" the capital markets have been over the past few years.

What are your thoughts on this?

Sidebar - I have also spoken with a few sponsors where the key servicers of these loans are VERY slow if not completely unresponsive to draw requests on loans. Not sure what this means, but seems odd to me.

2 Comments
 

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