3/22/2023 0 Comments Clo leverage moeld cashflows xls![]() ![]() Each tranche has a different claim priority on the cash received from the loan pool and exposure to loss from the underlying collateral pool. The senior secured position of these loans has contributed to higher historical recoveries in default scenarios than those seen in the senior unsecured high-yield bond market.Īt its inception, a CLO raises money to purchase a portfolio of loans by selling various debt and equity tranches to investors. Loans carry a number of covenants, including financial covenants that may restrict lender-unfriendly actions, and require compliance with certain credit metrics. Loans carry floating-rate coupons typically benchmarked to the Secured Overnight Financing Rate (SOFR). Most CLO collateral consists of senior secured loans, which have the first claim on all of the related company’s assets in the event of a bankruptcy and are intended to be the least risky investment in these companies. Loans are provided by a group or “syndicate” of institutional lenders and arranged by an investment bank. The proceeds of these loans are typically used by non-investment grade borrowers to support a range of activities, including mergers and acquisitions, stock repurchases, dividend payments, leveraged buyouts, or investment in new projects. Understanding CLO Collateral: Leveraged LoansĪ portfolio of loans act as the collateral supporting a CLO. Economically, the CLO equity investor is the owner of the pool of loans and the CLO debt investors provide term financing to acquire the pool of loans. These loans, also known as “bank loans” or “leveraged loans,” typically occupy a first-lien position in the company’s capital structure, are secured by the company’s assets, and rank first in priority of payment ahead of unsecured debt in the event of bankruptcy. The debt issued by CLOs consists of a variety of tranches, each with a risk/return profile based on its seniority and claim priority on the cash flows produced by the underlying loan pool. CLOs derive principal and interest from an actively managed, diversified pool of non-investment grade, senior-secured corporate loans.ĬLOs use funds received from the issuance of debt and equity to investors to acquire a diverse portfolio of typically more than 200 loans. Guggenheim Investments' long-term experience mobilizing credit research, structural analysis, analytic infrastructure, and legal expertise in service of our investment process positions us to capture the attractive relative and fundamental value in CLOs though a cycle.ĬLOs are a $910 billion asset class within the broader $12 trillion structured credit fixed-income market 1, which also includes asset-backed securities (ABS). Guggenheim Investments' long-term experience mobilizing credit research, structural analysis, analytic infrastructure, and legal expertise in service of our investment process positions us to capture the attractive relative and fundamental value in CLOs though a cycle.Credit performance through the Great Financial Crisis (GFC) and COVID-19 risk cycles has supported growth in the CLO market, broadened the investor base, and supported secondary market liquidity. ![]()
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