The Celeri Journal #103: The Great Lending Paradox

Written by Michael

On June 24, 2020

Global Markets Recap

The Wall Street Journal unveiled a somber report about the slowdown in corporate lending brought on by lingering effects of coronavirus. “One reason investors believe collateralized loan obligations (CLOs) are safer than the loans they hold is diversification. It’s less risky to own a pool of loans from companies in different industries than one loan from an individual company. Diversification has helped CLOs perform well during past recessions. This time is different because while some industries like retailers & airlines were hit hard by the sudden shock of the coronavirus, few were spared. The big rise in corporate borrowing in recent years magnified the impact because companies entered the downturn with heavier debt loads. Since early March, about 30% of debt packaged into U.S. CLOs has been downgraded or placed on watch, according to ratings firm S&P Global Inc. If companies can’t borrow, they can’t spend or even reopen. That could become a drag on the economic recovery & prolong the slowdown caused by the pandemic.”

It’s a great paradox for policymakers to consider as the economy attempts to rebound: central bank money is the cheapest it’s ever been; but how does that benefit Main Street if no one, or few, can borrow. This issue cuts at the heart of the national recovery.

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