The Federal Reserve Board ("FRB") provided information on the holders of collateralized loan obligation ("CLO") investors by location and investor type. The report, which combines data from the Treasury International Capital System ("TIC") and SIFMA, is the first such breakdown provided by a regulator. According to the FRB, it is important for regulators to expand the "very limited" information on CLO investors in order to assess their full exposures to the leveraged loan market.

FRB explained that CLOs are a class of securities that are backed by an underlying portfolio of corporate loans. U.S. CLOs are based on U.S. dollar-denominated leveraged loans, while European CLOs are backed by euro-denominated assets. According to the FRB, most U.S. CLOs are held by U.S. investors, issued out of the Cayman Islands by a Cayman-resident primary issuer, and concentrated in insurance companies, mutual funds and depository institutions.

FRB states that the U.S. CLO market accounts for approximately half of U.S. leveraged loans outstanding. Following a lull in U.S. CLO issuances outstanding after the last financial crisis, U.S. CLOs have "grown dramatically over the past several years" including, in particular, so-called "covenant-lite" loans.

Commentary / Mark Chorazak

The FRB's study comes at an interesting time, as concerns regarding the growth of the U.S. leveraged loan market have entered the mainstream and as presidential candidates – notably, Sen. Elizabeth Warren – have attempted to make leveraged lending levels a campaign issue. The study shows that U.S. depository institutions continue to hold a sizable portion of all Cayman-issued CLOs at year-end 2017. If an economic slowdown of some sort is indeed upon us, it's hard not to see the frothiness of the leverage lending market and the growing interconnectedness between banks and non-bank lenders as an area of enhanced supervisory attention.

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