Carlyle, KKR Get Ready to Snatch Up Bargain Loans

Big Funds Eye Discounted US Loans

Carlyle Group, KKR and Oaktree Capital Management are among the asset managers preparing to buy US leveraged loans that are increasingly available at discounted prices, according to people familiar with the matter. These firms are weighing the purchase of loans and their repackaging into bonds called collateralised loan obligations (CLOs). Several other fund managers are pursuing similar strategies, having arranged a near-record number of short-term credit facilities, known as warehouse lines, to accumulate loans for CLOs. Barclays strategists counted about 286 such open lines at last count.

Loans have become relatively cheap. JPMorgan strategists noted that more than 90% of leveraged loans traded below face value earlier in the week, the highest share in almost 18 months, before the figure eased to roughly 85% later. Spreads on this debt are near their widest levels of the past year. The concern in the $1.5-trillion leveraged loan market is that rising borrowing costs and inflation will pressure the weakest borrowers and lead to defaults. Invesco's Ian Gilbertson observed that the October selloff began in stressed, lower-rated loans but has since spread to higher-quality names, creating a more attractive entry point for CLO managers.

Why This Matters For Business

CLOs hold roughly two-thirds of the leveraged loan market, making them the largest investor category in this debt. Renewed CLO demand could therefore help some companies seeking financing at a time when the Federal Reserve is expected to keep raising rates and funding is tighter. Cheaper loans benefit CLO equity in two ways: higher yields from interest payments, and extra gains when loans bought below face value are repaid at par. CLO equity distributions are averaging 2.8% this quarter, on track for the first quarterly rise since 2024, though still low historically. New CLO issuance stands at about $139.2 billion this year, down over 16% year on year. The CLO arbitrag…