Out of nowhere, a $693 million loan Clover took to the market five years ago lost about a third of its value. This collapse was surprising to insiders who trade corporate loans.
Clover had been operating since 1996 when it was acquired by Golden Gate which followed an usual path of private equity buyouts — it piled debt on the underlying company to extract dividends.
Using the leveraged loan market as a wallet, the company took loans that funded dividend payments totaling at least $278 million — $100 million in 2013 and $178 million in 2014. Clover also asked lenders for a further $100 million in 2014 to pay for an acquisition.
Those loans, as is typically done, were bought mostly by mutual funds and collateralized loan obligations, which bundle such leveraged debt into higher-rated securities that are pitched to more risk-averse investors. There’s been little trouble finding buyers for CLOs in recent years. With yields on high-grade bonds at low rates across the globe, investors have been hungry for the juicy returns that these loans offer and, more and more, tend to overlook the lack of protection afforded.
Clover’s loan isn’t large by Wall Street standards, yet its decline set off alarm bells that regulators have been sounding for months. In a market where trading can be thin — and at a time when liquidity is suddenly becoming a prominent concern in credit circles — the episode shows how loans to highly leveraged companies can quickly implode when fortunes change.