A Collateralized Loan Obligation (CLO) is a complex securitization vehicle that purchases a diverse portfolio of leveraged corporate loans. The CLO funds these purchases by issuing various tranches of debt and equity to investors. These tranches are strictly ordered by seniority. As the underlying corporate loans pay interest and principal, the cash is distributed first to the highest-rated, most senior debt tranches, and then flows down to the riskier, subordinated tranches.
Unlike many other securitized products, the underlying loan portfolio in a CLO is typically actively managed by a specialized investment firm. This manager can buy and sell loans within the pool to optimize performance and manage credit risk. The floating-rate nature of the underlying loans means that the debt tranches issued by the CLO also generally provide floating-rate income, making them attractive during periods of rising interest rates.
Institutional clients use CLOs to access the leveraged loan market in a structured format. Senior tranches appeal to conservative investors seeking highly rated floating-rate assets, while the lower tranches and equity appeal to those seeking enhanced yield.
Unlike many other securitized products, the underlying loan portfolio in a CLO is typically actively managed by a specialized investment firm. This manager can buy and sell loans within the pool to optimize performance and manage credit risk. The floating-rate nature of the underlying loans means that the debt tranches issued by the CLO also generally provide floating-rate income, making them attractive during periods of rising interest rates.
Institutional clients use CLOs to access the leveraged loan market in a structured format. Senior tranches appeal to conservative investors seeking highly rated floating-rate assets, while the lower tranches and equity appeal to those seeking enhanced yield.