How does an overcollateralization test work in a CLO?
One such test is an overcollateralization test, which helps to keep the principal value of a CLO’s underlying bank loan pool from exceeding the total principal value of the notes issued by the various CLO debt tranches as long as the CLO debt remains outstanding.
What’s the difference between a CMO and a CLO?
Collateralized Loan Obligation – CLO. Loading the player… A collateralized loan obligation (CLO) is a security backed by a pool of debt, often low-rated corporate loans. Collateralized loan obligations are similar to collateralized mortgage obligations (CMO), except that the underlying loans are of a different type and character.
How are collateralized loan obligation ( CLO ) loans structured?
How CLOs Are Structured. Loans with lower credit ratings are initially sold to a CLO manager, who bundles multiple loans together and manages the consolidations, actively buying and selling loans. To fund the purchase of new debt, the CLO manager sells stakes in the CLO to outside investors in a structure called tranches.
Is the default rate for CLO’s that high?
Some argue that a CLO isn’t that risky. Research conducted by Guggenheim Investments, an asset management firm, found that from 1994 to 2013, CLOs experienced significantly lower default rates than corporate bonds. Only 0.03% of tranches have defaulted from 1994 to 2019.
How long does a Clo Clo usually last?
The Lifecycle of a CLO CLOs typically last a total of seven to ten years, inclusive of various lifecycle stages.
What are the structural features of a CLO?
Key structural features of a CLO include limited liquidity, especially for the more junior tranches, high levels of embedded leverage, and a wide range of return outcomes. CLOs are complex structures requiring the application of a best-in-class valuation analysis, particularly in the weeks before year-end audits.
Who is the collateral administrator in a CLO?
The Collateral Administrator—Typically, an affiliate of the trustee who acts as the CLO’s bookkeeper, generating and posting periodic reports for investors and rating agencies.