High-risk US debt makes comeback Bundles of high-risk US debt known as collateralised loan obligations - complex products at the heart of the financial crisis - are having a resurgence as investors hunting for returns alight on more exotic instruments. The number of fund management firms creating CLOs, leveraged vehicles that pool secured loans to low-rated companies and issue securities, has doubled in the US this year and the amount of money flowing into them has reached $34.7bn, more than the total for the previous four years combined. These vehicles were a vibrant part of the Wall Street securitisation machine in the run-up to the credit crisis, helping turn pools of lower quality loans into AAA-rated securities and bankrolling the boom in leveraged buyouts by private equity firms. CLOs assemble a pool of high-yield, high-risk loans and then sell tranches of debt to investors. Any losses on the underlying loans are absorbed first by equity holders - usually the CLO issuer or an affiliate - before being felt by investors in lower tranches of CLO debt. The top-tier AAA-rated tranches are theoretically left unaffected. "People are coming back to the asset class because it proved resilient and because it is a relative value play now," said Steve Miller, loan analyst at S&P Capital IQ. In the AAA tranches, banks and insurers are finding good relative value versus mortgage-backed securities and credit cards. In the scramble for returns in a low-yield environment, investors have already chased high-yield bonds and other asset-backed securities such as those backed by mortgages and credit cards, to historically high valuations this year. CLO issuers are readying themselves for what they expect could be strong investor interest in their asset class, too. A total of 53 firms have issued CLOs this year, compared with 26 in 2011. Allianz Global Investors Capital, a unit of the German financial giant, became the latest to return to the US market, with a $460m CLO last week. The total CLO issuance of $34.7bn this year compares with $12.3bn for the whole of 2011, and just $820m and $1.25bn respectively in 2009 and 2010. The peak year for issuance was 2006, when $97.0bn was raised. The return of CLOs has proved a boon to the market for the leveraged loans, the high-yield debt used to finance private equity buyouts. These vehicles are the biggest single source of demand for leveraged loans, though their share of the market had fallen below 50 per cent in the past two years. Their re-emergence has helped private equity firms launch a round of "dividend recapitalisations" this year, in which they issue new debt to pay for dividends from their portfolio companies. Mr Miller said that aside from bigger investor demand there was also more supply of leveraged loans for CLO pools. "There is more collateral to be had, which has greased the skids as well," he said. Peter Gleysteen, chief executive of CIFC, which has launched two CLOs this year, said the asset class "has what investors want: a proven product, attractive and reliable, that provides cash distribution over time and a degree of safety of principal."