BACKGROUND KNOWLEDGE


What added value do CLOs offer?

RESISTANCE


Secured corporate loans have shown almost exclusively positive annual performance for the past 25 years and have proven to be robust even in times of crisis.

DIVERSIFICATION


CLOs enable broad diversification across many corporate loans, thus reducing the risk of large losses.

OUTPERFORMANCE


CLOs achieve above-average returns through active management of the loan pool and thus benefit from market changes.

CLOs offer investors diverse investment opportunities due to their wide range.

Within CLOs, investors have the option to invest in different tranches. These typically range from "AAA" to "non-rated" and allow for the creation of countless risk/return profiles.


Within CLOs, investors have the option to invest in different tranches. These typically range from "AAA" to "non-rated" and allow for the creation of countless risk/return profiles.

The multi-layered collateralization within the loan pool ensures stability and security.


In addition, we regularly conduct stress tests to test the resilience of the CLOs in different market scenarios.

Key concepts related to CLOs

A CLO is a structured loan securitization consisting of a portfolio of senior corporate loans. These loans are divided into different tranches with varying risk profiles and issued to investors.

Loans that are secured by the borrower’s assets and are repaid before other debts in the event of default.

CLOs are divided into different risk levels (“tranches”), which have different repayment priorities. The main categories are:

  • Senior tranche – the safest tranche with the highest priority for repayments and the lowest return.
  • Mezzanine tranche – medium risk and medium return, receives payments after the senior tranche.
  • Equity tranche – the riskiest tranche, which absorbs losses first but has the highest potential return.

The regular interest payment that CLO investors receive on their shares. Senior tranches typically receive a fixed or variable interest rate, while the equity tranche derives its returns from remaining cash flows.

A CLO is a CLO where a CLO manager actively manages the loan portfolio by buying and selling loans to optimize the risk-reward ratio. This differs from static CLOs, where the portfolio remains unchanged after issuance.

CLOs are issued by a bank or financial institution to securitize loans from its own balance sheet and thereby free up capital. Unlike arbitrage-based CLOs, these are primarily used for balance sheet optimization.

Structure and control

A test that ensures the secured assets (loans) in a CLO are sufficient to cover the obligations to investors. If this test fails, cash flows from subordinated tranches can be redirected to senior tranches.

A test that verifies whether the interest income of the CLO portfolio is sufficient to cover the interest payments due to investors in the senior tranches. If this test fails, the payout to subordinated tranches can be stopped or reduced.

CLO Management

A specialized asset manager responsible for selecting, managing, and monitoring the loans within a CLO portfolio.

A rating assigned by agencies such as Moody’s, S&P, or Fitch that assesses the default risk of the various CLO tranches. The senior tranche often receives an investment-grade rating, while the equity tranche is usually unrated.

The phase (usually 3-5 years after issuance) in which the CLO manager can replace existing loans with new loans to optimize the performance of the CLO.

The risk that a borrower of a loan included in the CLO will not meet their payment obligations, which could negatively impact the CLO’s cash flows.

The hierarchical order in which the cash flows of a CLO are distributed to the various tranche investors. Senior tranches are served first, followed by mezzanine and equity tranches.

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