In the middle of December we here at the Bent checked in on the state of corporate debt markets. Particularly the market for collateralized loan obligations, which are similar to the collateralized mortgage obligations which decimated the economy in 2008. Instead of mortgages with a low probability of being paid back getting packaged together, slapped with high credit ratings, and shuffled between balance sheets as the people who trade them reap the benefits from the fees accrued; CLOs do all of this with corporate debt.
In December we said;
"a large wave of this corporate debt is maturing over the next 3-4 years and that puts the Fed, which is dealing with a liquidity crunch in the repo markets at the moment, in a precarious position as they will probably have to step in and purchase some of this toxic debt if enough individual loans within the products prove to be below the investment grade granted to them by ratings agencies and begin defaulting on their obligations."
Mind you freaks, this was all before the lockdowns started. Before the complete collapse of the oil and gas, airline, hospitality and restaurant industries. One must assume that the damage wrought on this class of CDOs has been catastrophic over the last few months. It is only a matter of time before the negative effects caused by mass defaults on the loans packaged in these products hits the market.
Here's an update on what's happened in recent weeks:
I find it hard to believe that the Fed and the Treasury have the wherewithal or ability to coordinate the necessary stimulus that would be needed to keep these loans afloat and avoid a collapse of the CLO markets. There are simply too many loans spread out across the whole market for the Fed and the Treasury to save. There are too many moles to whack. They will certainly try to whack all of them though.
If you think the expansion of the Fed's balance sheet up to this point in the crisis has been something to behold. Just wait. The lengths they will have to go to in an attempt to save this market will be awe inspiring.
I fear that this shut down, the collapse of yet another shiesty collateralized debt market, and growing distrust in & disdain for institutions the world over will lead to a cataclysmic market event the likes of which this world has never seen. Civilization is about to be tested like never before. There will be a lot more anger. Believe it or not, this is the calm before the storm.
Take care of yourself. Talk to your neighbors. Try to look out for each other.
Looking like tomorrow may be the first beach day of the year. Pretty pumped to jump in the ocean.