20. Introduction to CLOs
What Is a CLO?
A collateralized loan obligation (CLO) is a stand-alone entity (usually a special-purpose vehicle [SPV]) that owns a basket of corporate leveraged loans. The loans are the assets of the CLO. To fund the purchase of the assets, the CLO issues debt to investors. The debt makes up the liabilities of the CLO. The loans are the collateral that backs up the value of the debt tranches that the CLO issues.
The debt is typically issued in tranches with the senior-most tranche being rated AAA because of the excess value of the assets over this liability. Although the size of the senior-most tranche has varied over time, as a percentage of the total capitalization, a range of 60%–70% of the total capitalization ...
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