Animal Spirits Podcast Talk Your Book: Floating Rate Income
Mar 31, 2025
Fran Rodilosso, Head of Fixed Income ETF Portfolio Management at VanEck, and Bill Sokol, VP and Director of Product Management, delve into the world of collateralized loan obligations (CLOs). They discuss the structure of CLOs and their appeal to investors amid economic uncertainty. The duo analyzes the persistence of low credit spreads and explores how CLOs perform during recessions. They also stress the importance of strategic credit selection and the growing interest in CLO ETFs as a safe investment avenue in volatile markets.
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CLO Definition and Structure
- A collateralized loan obligation (CLO) is a portfolio of leveraged loans made to companies, packaged and sold to investors in tranches.
- These tranches have different risk levels and returns, with AAA being the safest and equity being the riskiest.
Floating Rate Nature of CLOs
- CLOs typically use floating interest rates because the underlying loans are also floating rate.
- This aligns the assets and liabilities, and banks, the traditional lenders, prefer floating-rate assets.
CLO Tranches and Investor Risk
- CLOs have an equity tranche (around 10%) and debt tranches (90%), ranging from AAA to BBB.
- Investors can choose their risk level by investing in different tranches, with AAA having the most subordination and highest priority in cash flows.