Lead-Lag Live
Understanding Collateralized Loan Obligations with Expert Shiloh Bates
Jun 26, 2024
Shiloh Bates, Chief Investment Officer at Flat Rock Global and CLO expert with over 20 years in the industry, shares invaluable insights on Collateralized Loan Obligations. He breaks down CLO structures, likening them to mini-banks with diverse loan portfolios. Shiloh discusses the attractive yields of CLO equity compared to traditional high-yield bonds, emphasizing lower default rates and recovery prospects. Additionally, he explores the importance of sector diversification and effective portfolio management in enhancing performance during economic downturns.
44:24
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Quick takeaways
- CLOs, functioning as diversified mini-banks, pool first lien senior secured loans to provide stable cash flow in various economic conditions.
- The structured tranching of CLOs, with different risk levels, allows for attractive risk-adjusted returns compared to traditional high-yield bonds.
Deep dives
Understanding Collateralized Loan Obligations (CLOs)
Collateralized loan obligations (CLOs) function like simplified banks that pool a diversified portfolio of loans, primarily first lien senior secured loans, often created during leveraged buyouts. These loans are appealing to private equity firms like KKR or Apollo, which use them to leverage their investments in companies, often financing a significant portion through term loans. A key component of CLOs is their tranching structure, where various securities, such as AAA and double B notes, are issued to finance the loan pool, each with different risk levels. The focus on double B notes and CLO equity is particularly noteworthy, as these often generate higher cash distributions to investors compared to traditional corporate bonds.
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