Professor Elam

I don’t know how long this will be up so click fast and read about CLOs.   These are Collateralized Loan Obligations ,the corporate equivalent of CMOs Collateralized Mortgage Obligations. The article details that individual investors have withdrawn over $4 B in the last few weeks from such mutual funds. And that debt is trading lower in value.  So the market for CLOs and ability to finance them, pools of loan to you guessed it, somewhat sub prime companies is shrinking.

We study the credit side of the balance sheet in Intermed II. The credit side lists loans for what is owed. Note we do not list the amount those loans carry in the after market.  This affects the ablity of those companies to re finance those loans. Let’s face it, most long term debt is not paid or removed from balance sheets, it is replaced with new debt. If refinancing channels are not available, then interest rates must go up for that capital, assuming a willing borrower can be found.  This lack of liquidity is forcing interest rates higher outside the highest rated debt.  Those costs must be passed on to someone. We noted just a couple of posts back that consumer confidence is the lowest since 2002. That is reflected in the inability to re finance loans.

Confidence recedes in a recession.