Why CLOs stand out in today's fixed income environment

Collateralized loan obligations (CLOs) are structures that pool together a large number of underlying corporate loans. CLOs then issue securities backed by those loans, but with varying levels of seniority. CLOs have long been favored by institutions like banks, insurers, pensions, and endowments, for the potential access to higher yields and the ability to fine-tune credit-rating exposure. CLOs hold bank loans, which can also be called floating-rate loans or leveraged loans. These are loans issued with rates that “float,” or adjust periodically—typically at some kind of set premium over a short-term market rate. The loans are generally issued by below-investment-grade companies and are often a favored form of financing used by private equity firms in conducting leveraged buyouts. But they’re not concentrated in any one sector or pocket of the economy—which helps provide diversification.

• Potentially higher yields
• Limited interest rate risk
• Embedded credit protections
• Credit risk and price volatility
• Daily liquidity