A collateralized loan obligation (CLO) is a securitization product created to acquire and manage a pool of leveraged loans. CLOs issue multiple debt tranches along with equity and use the proceeds from the issuance to obtain a diverse pool of syndicated bank loans. Interest and principal cash flows generated from the underlying collateral pool flow through the CLO and are distributed to debt and equity investors. Each debt tranche carries a different risk/return profile based on credit quality, risk of loss and priority to cash flow distributions. Structural features of the CLO, including coverage, diversification and exposure tests, dictate cash flow mechanics and further add to the risk/return profile.
Investment options range from AAA-rated debt tranches to non-rated equity. Banks, asset managers, insurance companies, pension funds, mutual funds, hedge funds and high net worth individuals are active investors in the CLO market and are attracted to the variety of risk/return options.
Given the complexities of the CLO structure and nuances of the bank loan asset class, it’s helpful to partner with an experienced service provider.