A Collateralized Loan Obligation (“CLO”) is a structured product securitized by a diverse portfolio of high yield bank loans.
These vehicles issue both debt and equity, each with a different priority of claims on a CLO’s underlying collateral. In addition to compelling risk-adjusted returns, CLOs provide a range of investment options; investors can choose their risk exposure, from “high quality” AAA-rated debt tranches to non-rated equity (also known as subordinated notes).
Why Invest in CLOs?
- No market value triggers – CLOs are generally not “marked to market” and therefore are less likely to be subject to valuation triggers or margin calls.
- Range of risk/return exposure – A CLO’s AAA-rated tranche can offer returns greater than similarly rated debt instruments, while a CLO’s equity can offer a higher return potential.
- Duration protection – Because both the collateral and underlying rated debt have floating rate coupons, CLOs provide a natural hedge against rising interest rates.
- Investor Protections – CLOs have numerous tests and covenants designed to help protect investors, such as credit quality requirements and minimum interest and collateralization levels.