Debt Market Booms, Risk Climbs

Concentrated debt in the CLO market sparks a junk bond flashback
By Dustin Lushing,  Newser Staff
Posted Jun 26, 2007 4:11 PM CDT
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(Newser) – The undergirding of the current buyout boom is a dicey financing method called collateralized loan obligations—giant pools of bank loans packaged together by Wall Street and sold off in slices to investors, spreading the risk of default. The Journal reports that the  CLO glut is ushering in an age of overborrowing that could cripple buyout firms, and the economy, in the future.

Currently, CLOs are thriving under low default rates; but that could easily sour, sparking memories of the junk bond crash of the 1980's. More than $163B was lent to pay for the $194B in leveraged buyouts last year, according to the S&P.