The loans typically represent first-lien instruments secured by the assets of the company. These leveraged loans represent the (heretofore LIBOR-based) floating-rate debt of corporate obligors with below-investment-grade or high-yield credit ratings. To begin, the ultimate performance of CLOs is directly related to the characteristics of the collateral pool, consisting of broadly syndicated corporate bank loans. CLOs are securitizations in which pools of loans are transferred into a special-purpose vehicle, which in turn issues debt and equity securities to investors.ĬLOs have a number of defining structural features. We provide an overview of the mechanics of CLO vehicles and summarize the methods and assumptions used by market practitioners and independent advisors to value the CLO equity tranche.ĬLOs are a class of structured credit products that repackage and transfer the risk of syndicated bank loans into the capital markets. From a valuation perspective, the equity or residual tranche of a CLO provides the greatest challenge, as these financial instruments are the most sensitive to the performance of the underlying collateral. CLO securities also represent an important asset class for alternative-asset managers, business development companies, financial institutions, and other fixed income investors.Ĭonsidering the popularity and market significance of CLOs, we provide a primer on the fair value measurement of the most illiquid class of CLO investments in the context of financial reporting. CLOs are currently a significant source of financing for middle market corporations and act as the largest buyer of leveraged loans. CLO vehicles have generated favorable returns for debt and equity investors in a post-crisis environment characterized by benign corporate defaults coupled with stabilized or generally tightening credit spreads. CLOs are fixed-income securities that provide investors with a diversified and structured exposure to the syndicated corporate loan market. The collateralized loan obligation (CLO) market has flourished in the 10 years following the credit crisis.
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