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Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6
Forward Guidance
Collateralized Loan Obligations: Valor in Structure, Security in Securitization
Collateralized Loan Obligations (CLOs) emerge from the evolution of securitization, aiming to optimize bank balance sheets by allowing banks to sell off loans, thereby facilitating increased lending potential. Designed to appeal to institutional investors, CLOs initially capitalized on consumer debt like mortgages and auto loans, later expanding to corporate lending through below investment grade loans. The underlying collateral in a CLOs, typically leveraged loans, possesses intrinsic value, as these debts are secured by corporate assets, contrary to equity investments which can become worthless. In bankruptcy scenarios, CLOs exhibit significantly higher recovery rates—between 60% to 70% for first lien loans—compared to just 25% to 40% for high-yield debt, enhancing their attractiveness as secure investment vehicles. Through 30 years of performance data, CLOs demonstrate low default rates, high yields, and minimal loss rates, making them a compelling choice for risk-averse investors seeking exposure to corporate debt.
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