With leveraged loans, covenants intended to protect lenders may be an endangered species; more loans now feature high debt-toearnings ratios; and the use of optimistic projections including “earnings add-backs” is becoming more common. The rise in riskier business borrowing has been funded principally by nonbank lenders. Collateralized loan obligations are now the largest lenders, with about 62 percent of outstanding leveraged loans (figure 4).
These lenders are actively managed securitization vehicles that mostly buy higher-risk assets like leveraged loans. CLOs, in turn, are funded by a slice of equity and layers of debt of varying seniority. After CLOs, mutual funds are the next-largest vehicle for holding leveraged loans, with about 20 percent of the market.