![]() ![]() Throughout the lifecycle of the CLO, interest and capital repayments received from the asset’s underlying obligors are then used to pay the CLO managers’ investors in line with the structure’s cash flow waterfall. The subsequent ‘reinvestment period’ sees the CLO manager trade assets (active management being a key distinguishing feature of this asset class, and is examined directly below), and the ‘post-reinvestment period’ or ‘amortisation period’ sees the CLO manager pay down the outstanding notes. The ‘ramp-up period’ sees the CLO manager buy further assets using the issuance proceeds. Having raised capital from investors, the CLO manager then participates in syndications, carefully researching and buying tranches of assets that match the risk-return expectations of their investors, known as the ‘warehouse period’. Loans that yield over 125 basis points above a particular benchmark interest rate and which are also secured by a first or second lienĪ CLO manager establishes an SPV, and then creates a capital structure comprising various tranches, ranging from debt tranches rated AAA down to BB, with the sole equity tranche sitting below this (see Figure 1).Senior secured bank loans to sub-investment grade corporates rated BB+ or lower or else are.Leveraged loans are typically defined as: Such syndication can occur regarding loans to investment grade borrowers but it also occurs regarding leveraged loans – both those which are ‘broadly syndicated loans’ (the most common form of leveraged loan) as well as those made to the mid-market. However, the syndicate will also include other banks, funds and other participants. The syndicate of lenders will include the originator bank and will have the relationship with the underlying corporate. ![]() ![]() This both enables borrowers to raise greater sums and lenders to reduce their risk exposure. Syndicated loans see a group of lenders pool their resources to make a loan to borrowers who are usually privately held companies, but sometimes also a special purpose vehicle (SPV) relating to a project. ![]()
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