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How Risky Loans Are Kept Afloat in Alphabet Soup - Wall Street Journal

The last financial crisis cleared out an alphabet soup of complex credit products. One type, however, has returned in droves in recent years, although popularity is now threatening their viability, the Wall Street Journal reported on Tuesday. This product is collateralized loan obligations (CLOs), which buy portfolios of risky, leveraged loans often used by private-equity firms in buyouts. In the U.S., new CLO volumes have outstripped pre-crisis totals since 2014, while Europe is catching up to its previous levels fast. But returns from the loans they buy are getting squeezed as money from retail and institutional investors rushes in alongside CLOs to snap up loans. That could bring CLOs to a painful halt again. The biggest CLO managers, such as Blackstone’s GSO Capital Partners, Carlyle Group, Investcorp and Alcentra, run billions of dollars’ worth of deals. Such vehicles own more than 60 percent of the more than $900 billion in outstanding U.S. leveraged loans, according to S&P Global LCD.

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