Frequently asked questions

“CLOs caused the crisis.”

CLOs securities are cash only instrument with no derivatives or leverage. They were one of the earlier asset classes to recover after the crisis because they have downside protection via liens and covenants and senior status in issuers' capital structures.

(SPBDLL Index)

“CLOs are highly illiquid.”

CLOs trade actively in the secondary market mainly through banks and brokers. As an example: one form of execution is known as BWIC (bids-wanted-in competition) which had a turnover of USD 8bn in 2016 Q3.

(Citi Velocity)

“CLOs suffer from high default rates.”

Global CLOs loss given default rates (LGD) is very low: for the cumulative 5yr period including the crisis (mid-2008 to mid-2013) the LGD for all CLOs was only 1.35%. While after the crisis this was even lower (cumulative 5yr from Jan 2010 was 0.01%).

(Moody’s Default Study)

“CLOs are structured products that have no real market value.”

The collateral held in CLOs are portfolios of sub investment grade corporate loans.  These loans are less expensive and more efficient to administer than traditional bilateral, or individual, credit lines. In today's low rates and slow growth environment, CLOs offer investors, a unique diversification option due to their strong risk/reward ratios.

(CIS Research)

“CLOs are not transparent.”

CLOs differ from investments such as hedge funds in that they provide very detailed reports to all their investors. Generally, CLOs provide a report of their monthly activity (Trustee Reports) which also includes various structural tests conducted. Apart from this, CLOs also provide, the indenture/contracts and payment reports based on the payment frequency.

(CIS Research)