Rating triggers in collateralized loan obligation (CLO) transactions create the risk of a rapid fall in leveraged loan prices in 2023. Leveraged loan issuers might be wise to consider getting ahead of this risk and refinancing upcoming maturities early.

Leveraged loans in the US and Europe are predominantly bought by CLOs. CLOs generally have caps on their holding of lower rated loans. As interest rates rise and the recession plays out, credit ratings on underlying loans are likely to be downgraded – which may force selling by CLO managers.

This could in turn reduce the availability of loan issuers to refinance themselves – further reducing their credit ratings and having a further impact on the market through the impact of these downgrades on CLOs.