The Evolution of the CLO Market since the Global Financial Crisis and a Valuation Approach for CLO Tranches

Kashyap Arora and Kimito Iwamoto

A leveraged loan is a type of loan extended to companies that already have a considerable amount of debt. The US leveraged loan market grew from USD565 billion in 2007 to USD1.3 trillion in 2019, according to JP Morgan high-yield and leveraged loan market size data as of June 30, 2019. This market plays a critical role in providing funding to non-investment-grade companies. Collateralised loan obligations (CLOs) are closed-end structures that function like finance companies and invest in leveraged loans. CLOs issue term debt and equity to finance the purchase of diversified portfolios of leveraged loans. CLOs are structured products backed by a portfolio of 100–200 leveraged loans from 25–35 industries. CLO debt tranches are typically rated AAA to BB by rating agencies, and they pay floating rate coupons based on the London Interbank Offered Rate (Libor), while unrated CLO equity tranches pay residual cashflow. The CLO market is an integral part of the US leveraged loan market, having acquired approximately 68% of all leveraged loans issued in 2018 per Standard & Poor’s (S&P) Global Market Intelligence Data. US CLOs weathered the 2007–9 global financial crisis (GFC) well relative

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