At the peak of the last financial crisis, as the credit liquidation wave was jumping from one highly levered product to the next, one of the hardest hit sectors was the Collateralized Loan Obligations (CLO) space, where the rout and massive P&L losses across most tranches led to a revulsion for new issuance, which effectively shut down the sector for the next 3 years.

However, as central banks pumped trillions into the market, it ultimately found its way back into the new and improved, or 2.0, CLO market, where the resurgent euphoria led to a record $124.1 billion in new CLO issuance in 2014, with 2015 tailing modestly with $97.3 billion as the second busiest year for CLO issuance in US history and surpassing the last bubble peak.

The problem is that with much of loan issuance in recent years going to the lately very troubled energy companies, it now appears that the second CLO explosion in 10 years may be on deck.

As Reuters reports, downgrades to energy companies’ credit ratings are weighing on Collateralized Loan Obligations (CLO) funds’ portfolios, in another hit to a market already facing a drop of more than 50% in issuance this year. According to a report issued by S&P, the credit quality of CLO assets is deteriorating, the result of 45 energy borrower downgrades this month as oil prices remain around all-time lows. S&P notes that the credit ratings of around 1.4% of assets held by US CLOs have been downgraded or placed on credit watch with negative implications this year.

To be sure, the S&P report comes well after the market itself has figured out the latent risk in CLOs, as the following performance chart clearly shows:

According to Morgan Stanley, while the pain is spread out across all tranches, it is most acute in the single-B layer. From MS:

Distress in US CLO Market Continued in January 2016. Based on our sample, we estimate that the median total return for US CLO 2.0 (2014-15 vintage) BBs is -9.2%, and for single-Bs is -20.9%. Investment-grade US CLO tranches performed better but still within negative total return territory, except for AAAs. Collectively, US CLOs significantly underperformed relative to comparably rated corporate bonds, leveraged loans and senior tranches of CMBS.