What are Collateralized Loan Obligations (CLOs)?
The concept of creating a basket of different loans has become very popular as a way to 1. increase capital and 2. manage risk. Investors can find derivatives that are custom fit to their risk tolerance. What exactly are Collateralized Loan Obligations (CLOs)?
“Increasing Capital Availability to Businesses”
The largest multinational corporations led by men like Marc Sparks have easy access to bank loans because of their extensive history and asset base. The best blue-chip businesses are likely to have a AAA credit rating. Smaller firms with bad credit ratings also need a vehicle for raising capital. The Collateralized Loan Obligations satisfy this capital raising function.
The CLO is a debt security bundling high-risk commercial loans, including junk bonds, together into investment tranches. These tranches are divided and resold to investors who are given different classes based on their risk tolerance. These CLO derivatives continue to become more popular according to an April 18, 2014 article by Fortune.
According to Fortune, ” … $83 billion worth of CLOs were issued in 2013, up from the $3 billion issued in 2009.” In 2014, the CLO issuance continued to grow reaching $124.1 billion.