Carlyle, KKR and Oaktree eye discounted leveraged loans

Investors Carlyle, KKR, and Oaktree Capital Management are reportedly eyeing the opportunity to purchase discounted US leveraged loans in order to package them into collateralized loan obligations (CLOs), as reported by Bloomberg. These managers have established around 286 warehouse credit lines, marking a near-record total, according to Barclays strategists.

Prior to this recent trend, over 90% of leveraged loans were trading below their face value earlier in the week. However, this share has since eased to approximately 85% as spreads remained near their widest levels in the past year. The sell-off has not been limited to distressed borrowers, but has also impacted higher-quality companies, presenting managers with potential opportunities to acquire loans at discounted prices.

Despite this positive development, investors are cautious as they worry that elevated borrowing costs and inflation could lead to an increase in defaults across the $1.5tn market. Through Thursday, US new-issue CLO sales reached $139.2bn, marking a decline of more than 16% year on year. While improving returns for CLO equity investors could support issuance, distributions remain relatively low compared to historical norms.