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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Daniel L. Brockett
[email protected]
Phone: +1 212 849 7345

Jonathan E. Pickhardt
[email protected]
Phone: +1 212 849 7115

Sascha N. Rand
[email protected]
Phone: +1 212 849 7175

Manisha M. Sheth
[email protected]
Phone: +1 212-849-7441

Ellison Ward Merkel
[email protected]
Phone: +1 212-849-7362

Tom J. Lepri
[email protected]
Phone: +1 212 849 7275

Toby E. Futter
[email protected]
Phone: +1 212 849 7431

Blair Adams
[email protected]
Phone: +1 212 849 7615

Emily Kapur
[email protected]
Phone: +1 650 801 5122

John B. Quinn
[email protected]
Phone: +1 213-443-3200

Harry A. Olivar Jr.
[email protected]
Phone: +1 213-443-3176

R. Brian Timmons
[email protected]
Phone: +1 213-443-3221

Molly Stephens
[email protected]
Phone: +1 213-443-3635

Richard East
[email protected]
Phone: +44 20 7653 2222

Yasseen Gailani
[email protected]
Phone: +44 20 7653 2021

Jonathan C. Bunge
[email protected]
Phone: +1 312-705-7476

Harvey J. Wolkoff
[email protected]
Phone: +1 617-712-7108

Michael Lyle
[email protected]
Phone: +1 202-538-8166

Karl Stern
[email protected]
Phone: +1 713-221-7171