How Does a CLO Work? (Updated)
Have you ever wondered how CLO tranche ratings—AAA, AA, A, BBB, and BB—are derived from a portfolio of non-investment grade loans?
Have you ever wondered how CLO tranche ratings—AAA, AA, A, BBB, and BB—are derived from a portfolio of non-investment grade loans?
CLOs are primarily actively managed, and some commonly used deal metrics—point-in-time indicators—can occasionally be misleading. While these metrics can be useful, they should not be considered in isolation. Additionally, combining multiple metrics does not necessarily provide a clearer picture. For example, the weighted average price (WAP) of a CLO portfolio does not measure return performance over time and can be artificially inflated by trading activity. Though WAP is helpful for quick screening, it is not a reliable indicator of whether one manager has outperformed another. The same applies to annual equity distributions—a higher distribution does not necessarily indicate better manager performance. Therefore, combining these two metrics does not necessarily offer a more accurate assessment of a manager's performance.
Securitisation can certainly play a crucial role in facilitating the mobilisation of institutional capital into infrastructure financing, especially for sustainable infrastructure and clean energy projects. Additionally, it can help banks recycle their balance sheets into originating new loans to finance such infrastructure initiatives.
This theoretical exercise of understanding the floor highlights the vast amount of credit support in the 2.0 EU CLO structure post-GFC.
Is the Post-FInancial Crisis Arbitrage US CLO Structure Too Conservative? The term 'arbitrage' would suggest a pretty good average IRR...
This research report is now available to bloomberg terminal users.
