Key takeaways:
- CLOs offer portfolios of floating-rate bank loans securitised across the rating spectrum. The availability of floating-rate bonds is limited in the US, and the choices for high-quality
floating-rate securities are even more limited, yet around 75% of CLOs carry a credit rating from A to AAA. - Relative to the investment-grade corporate credit market, CLOs have offered a consistent yield premium across the rating spectrum, in some cases as much as two times the yield offered over US Treasuries.
- In an environment where interest rates are rising, allocations to CLOs may help investors diversify a traditional fixed income portfolio, offering lower volatility, higher credit-quality and less sensitivity to any rise in interest rates.
CLOs are not a new asset class, but their availability to a wider range of fixed income investors is. CLOs have been a part of the vast securitised products market, which includes mortgage-backed securities (MBS) – the second largest bond market in the world – for about 30 years. Like all securitised products, a CLO manager pools together different loans to create a portfolio in an attempt to produce a more diverse and more secure offering. MBS do this for home mortgages; CLOs do this for commercial bank loans.
JHI