IOSCO Seeks Feedback on Proposed Good Practices on Leveraged Loans and CLOs and Publishes its Thematic Analysis on Emerging Risks in Private Finance

The International Organization of Securities Commissions (IOSCO) has released two reports addressing critical market risks.
In the CR05/2023 Leveraged Loans and CLOs Good Practices for Consideration consultation report, IOSCO acknowledges the historical stability of LL and CLO markets, particularly during the GFC. However, the LL market has undergone significant changes, including a shift in borrower profiles towards technology and healthcare sectors and a decline in corporate borrower credit quality. Additionally, the LL market has witnessed increased complexity in documentation and the use of optimistic EBITDA adjustments.
IOSCO’s analysis of these developments highlights vulnerabilities, including weaker investor protections due to fewer covenants and concerns about transparency. The report outlines twelve proposed good practices spanning themes like origination and refinancing, transparency in EBITDA and loan documentation, alignment of interests, and ongoing disclosure of information. Feedback is sought from stakeholders on these proposed practices to support decision-making within the LL and CLO markets, and should be sent to LL-CLOconsultation@iosco.org on or
before 15 December 2023.
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In the separate FR10/23 Thematic Analysis: Emerging Risks in Private Finance final report, IOSCO delves into emerging risks in private finance markets. Indeed, private finance has experienced substantial growth, with private market assets under management reaching $12.8 trillion USD in June 2022. While these activities can benefit the economy by financing growth areas and providing developmental finance, they also pose risks.
IOSCO highlights potential vulnerabilities, including opacity in private finance markets, conflicts of interest, and the potential transmission of risks into public markets. It notes the challenges posed by interest rate normalization, which could reduce funding availability and lead to higher rates for portfolio companies. The report also discusses the potential for increased equity financing and the associated valuation concerns.
Moreover, the report underscores the interconnectedness of private and public markets, emphasizing the critical role of private finance in specific sectors, such as technology and healthcare. It points out the challenges of mapping risk transmission due to limited data availability. Lastly, IOSCO acknowledges the entry of retail investors into private finance, with associated regulatory and transparency considerations.