Kroll Bond Rating Agency (KBRA) releases a guide to understanding the Collateralized Loan Obligation (CLO) product. The report, KBRAs Structured Credit 101: Collateralized Loan Obligations, discusses the appeal of investing in CLOs and offers a foundational overview of key CLO features.
Collateralized loan obligation (CLO) issuance volumes reached a record high in 2018. In creating an overview of the CLO product, KBRA believes an interesting place to start would be to ask, Why?, as in: Why are CLOs so appealing? At a high level, CLOs address the basic needsefficiency and diversificationof many types of market participants. Archetypal CLOs can hold hundreds of corporate loans, creating highly diversified investments and securities that can be directly held by nearly all interested parties. As they issue securities at different risk levels, CLOs appeal to risk-averse investors focused on income or capital preservation, as well as risk-tolerant investors focused on growth or return. In order to reach a more definitive answer, we need to examine the products suitability, opportunities, and stability.
In addition, the report explores the features that make CLOs such unique investments. KBRA provides a breakdown of the CLO structure, from the risk and return profile of different CLO tranches, to the various types of built-in protections to shield investors from potential losses. We also discuss the chronology of a CLO from genesis to maturity, including the evolution of reinvesting CLO portfolios over time. We take a closer look at portfolio composition and typical collateral guidelines found in governing documents. Finally, we provide graphical and numerical examples to help explain two of the most important features of a CLOovercollateralization and excess spread.
Related Publications: (available at www.kbra.com)
- Global Structured Credit Rating Methodology
- 2019 Structured Credit Outlook
- New Issue Report: THL Credit Wind River 2015-1 CLO Ltd
- What Is the Loan Market Telling Us?
- Par Wars: Attack on the Loans
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KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus, is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
Sean Malone, CFA,
George Lyons, CFA, Director
Eric Hudson, Managing Director