Collateralised Loan Obligations

CLOs are debt securities which underlying assets are pooled portfolios of loans or debt instruments issued by companies or private equity firms.

After being repurchased, these loans are securitised and sold back into various tranches to investors with possible higher return than traditional loan investments.

The traditional composition of a CLO portfolio includes between 150 and 450 loans from 20 to 30 different industries which are segregated into senior tranches (Rated AAA and AA), mezzanine tranches (Rated A, BBB and BB) both accounting in general for 90 % of the portfolio and the last element consist of the equity tranche which is riskier but with higher returns potential.

What are the advantages of CLOs and their underlying securitised leveraged loans?

• The CLOs offer greater flexibility through a broader product range and a well-diversified group of issuers
• The CLOs tend to offer a steady frequency of interest payment (generally on quarterly or monthly basis)
• The CLOs usually have high liquidity in terms of trading
• The CLOs have a lower default rate in comparison to other non-diversified securitised products
• The CLOs have a low interest-rate sensitivity due to their floating-rate nature in comparison to fixed rate instruments
• The floating-rate nature of CLOs make them a good instrument to tackle inflation