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COVID-19 Exacerbates High Risks of Collateralized Loan Obligations for Investors

Collateralized Loan Obligations Are Losing Value In The Wake Of The Coronavirus 

Investors who have suffered losses from collateralized loan obligations (CLOs) after the outbreak of the novel coronavirus (COVID-19) should contact one of our broker fraud lawyers right away. 

While the pandemic is responsible for much of the volatility impacting the markets, bad advice by your stockbroker and their firm recommending that you invest in this form of security may also have contributed to how your portfolio has been affected. 

Shepherd Smith Edwards and Kantas (SSEK Law Firm) represent CLO investors throughout the United States in helping them to file their FINRA arbitration claims against brokers and their firms that may have been negligent or acted fraudulently. 

CLOs Could Prove To Be This Economic Crisis’ CDO 

Collateralized loan obligations are derivative securities backed by private bank loans issued to corporations with low or no credit ratings. 

Here Are Some Of The CLO Funds That Are Performing Badly: 

  • Blackstone/GSO Senior Floating Rate Term (BSL)
  • Eaglepoint Credit Company (ECC)
  • Highland Floating Rate Opportunities (HFRO)
  • Oxford Lane Capital Corp (OXLC)
  • Aberdeen Income Strategies Fund (ACP)
  • OFS Credit Company Inc (OCCI)
  • XAI Octagon FR & Alt Income Term Trust (XFLT)

During the 2008 financial crisis, it was collateralized debt obligations (CDOs), which hold a lot of debt, that underwent a financial meltdown. With COVID-19 in 2020, CLOs look like they will be the ones in trouble. Just as with CDOs, these loans are structured products that are formed by pooling assets together to create new securities. 

Collateralized loan obligations are primarily packaged from leveraged loans, which saw their prices drop in March. A leveraged loan is issued to individuals or companies that either has a poor credit history or are already holding a lot of debt. 

According to Bloomberg, approximately 60% of loans issued to firms that are sub-investment-grade can be found in CLOs. This could prove harmful to investors if a whole bunch of these loans undergo a downgrade. Already, prices of US leveraged loans saw a significant drop during the first quarter and that was just as COVID-19 was beginning to wreak havoc upon the economy. 

Now, market watchers are saying to expect defaults that could make it impossible for investors to recover more than up to 60 cents for every dollar invested. 

Bloomberg also points to two Wells Fargo (WFC) and Nomura Holdings analysts who’ve stated that already over 10% of US CLOs are at risk of not being able to issue any cash payments to those holding their most high-risk portions. This is in the wake of downgrades that are already happening and are forcing managers of these derivative securities to deal with more low-rated debt than what is usually allowed. 

Why Are Leveraged Loans Popular Among Investors? 

One reason leveraged loans, have been so appealing for investors is that they can render high returns. Institutional investors especially, including pension funds, banks, and insurance companies, are attracted to leveraged loans and CLOs. Now, however, there is growing concern over whether CLO funds can pay their tranches. Obviously, a failure to do that would impact investors.

Already last month, Reuters was reporting that investment firms were thinking of adding COVID-19 as one of the risks that CLO investors might be taking on. But for the investors who have already lost money, these warnings may be too late. For some of them, CLOs may have been unsuitable investments from the outset. 

File A Misrepresentations and Omissions Claim 

During the 2018 financial crisis, our investment fraud lawyers at SSEK Law Firm worked with investors to recoup their losses after many of them were not appropriately told of the risks involving their collateralized debt obligations. Now, during COVID-19, our CLO fraud attorneys are here for you.

Your first consultation is a free no-obligation assessment. We work on a contingency basis, which means we are only paid if there is a financial recovery for you. Over the years, we have helped thousands of investors in getting back their investment losses. SSEK Law Firm works with high net worth individual investors, institutional investors and retail investors. Contact us today.

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