On 14 September 2023, the International Organization of Securities Commissions (IOSCO) published a consultation report on leveraged loans (LLs) and collateralised loan obligations (CLO) good practices for consideration.
Broadly speaking, LLs are loans to highly indebted, non-investment grade, non-financial corporate issuers and are commonly used to fund mergers and acquisitions. They are typically structured as a debt package that includes a revolving loan with traditional financial covenants. CLOs are a type of securitisation in which a portfolio of LL assets is typically bought by a bankruptcy remote special purpose vehicle that finances the portfolio by the issuance of financial instruments in the form of bonds. CLOs are usually managed by an investment management firm typically called the CLO manager.
IOSCO has been following the evolution of the LL and CLO markets and examining the impact of fewer and looser covenants on investor protections, whether there is adequate transparency in the LL and CLO markets and whether potential conduct-related issues have arisen, as a result of recent market developments.
The consultation report:
- Provides an overview of the LL and CLO markets and their evolution since the global financial crisis.
- Explains why the vulnerabilities identified in the LL and CLO markets could impact IOSCO’s objectives of (i) protecting investors, (ii) ensuring that markets are fair, efficient and transparent, and (iii) reducing systemic risk.
- Describes in detail the following twelve proposed good practices grouped into five themes: i) origination and refinancing based on a sound business premise; ii) earnings before interest, taxes, depreciation and amortisation, and loan documentation transparency; iii) strengthening alignment of interest from loan origination to end investors; iv) addressing interests of different market participants throughout the intermediation chain; and v) disclosure of information on an ongoing basis.
- Seeks feedback on the proposed good practices and the consultation questions, as set out in the consultation report.
The deadline for feedback to the consultation report is 15 December 2023. Thereafter, IOSCO will consider the feedback with the aim to finalise the good practices by Q1 2024.