US Outlook: CLO Litigation Arising From The 2020 Downturn

Given the extraordinary impact of COVID-19 on the world economy, a global recession is now very likely, if not a certainty. According to Fitch: “83% of sector and structured finance asset performance outlooks are negative, up from 21% at the beginning of 2020. There are no positive sector outlooks.” Among its many effects, this broad multi-sector downtown will severely impact the hundreds of billions of dollars of Collateralized Loan Obligations (“CLOs”) that have been issued in recent years. Wide-ranging, cross-sector defaults are expected for the loans that collateralize CLOs, and extreme loss severity is expected when those defaults occur. CLO structures may therefore experience unprecedented losses that extend toward even the more senior and risk-remote tranches. These losses are likely to spawn various types of CLO-related litigation. This memo provides background on the CLO market, CLO structure, and the types of disputes that can be expected to arise as losses mount.

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