Arena Investors CEO Dan Zwirn is sounding the alarm that COVID-era monetary and fiscal policy has led to a bubble within leveraged finance asset classes. Zwirn believes that much of the current economic policy is nothing short of irresponsible and that it has encouraged a grab by companies and others for “undifferentiated, price-taking capital.”
Fueling this trend, Zwirn says, is a yield hunger on the part of investors that he says is driving “strange outcomes.” “Doing those deals makes no sense on a risk-return basis for investors,” he says—and he calls collateralized loan obligations (CLOs) in particular “the most bubbly of bubbles because no one sees themselves as taking a risk.”
The CLO industry rejects the idea of the credit-market bubble described by Zwirn, with one argument being that the worst loans have already been flushed out through bankruptcy and that the remaining market is well-capitalized.
But Arena Investors’ Zwirn is not swayed by such a description. For one thing, he sees the current environment of rising inflation as continuing. For now, barring an unusual situation where compensation for risk stems from other factors, Arena Investors’ portfolio is positioned away from credits that fit the general CLO mold.