Below are answers to some of the most commonly asked questions about leveraged loans and CLOs. If you have a question that is not addressed, please feel free to contact us.
What is a leveraged loan?
Leveraged loans are simply loans made to non-investment grade companies, which comprise the vast majority of American companies and include well-known brands. Most leveraged loans are provided by non-bank lenders.
What does non-investment grade mean?
The majority of companies in the United States are classified as non-investment grade based on the credit rating they are given by a rating agency. In fact, of the approximately 2,000 companies rated by Moodys, roughly 28% are investment grade, while approximately 72% are non-investment grade. These include companies like Hilton, Burger King, Delta, Goodyear, Dell and Ancestry.com.
What is a non-bank lender?
A non-bank lender is simply a lender that is not a commercial bank. Non-bank lenders include CLOs, mutual funds, insurance companies, pension funds and hedge funds.
What is a securitization?
Securitization refers to the process of taking debt contracts (such as loans - a contract made between a lender and a borrower) and bundling them together to create a new asset. Portions of this new asset are then sold to investors who are repaid from the principal and interest collected to settle the original debt contracts. Securitizations facilitate the availability of affordable financing to consumers and businesses.
What is a CLO?
A collateralized loan obligation or CLO is a securitization of corporate loans. A CLO manager invests in leveraged loans made to companies and packages them into a portfolio. Investors can then buy portions of that portfolio according to their risk appetite. Investors have seen very few losses when investing in CLOs.
Why are CLOs important?
CLOs provide safe, stable, and affordable credit to US non-investment grade companies.
CLOs have provided over $440 billion in financing to more than 1,200 American companies. It is estimated that companies that rely on CLOs employ more than 7 million people.
Weren't CLOs involved in the financial crisis?
No. Despite the similarities in their names, CLOs are distinctly different from the products involved in the financial crisis, collateralized debt obligations (CDOs).
The assets within CLOs are concrete loans to real companies and are not an “originate-to-distribute” product. Additionally, CLOs are actively managed by individuals who have a vested interest in their performance. As a result, CLOs played no role in the financial crisis, and continue to provide financing to American companies to this day.
Are CLOs risky?
No. CLOs have performed extraordinarily well. Cumulatively, over the last 20 years, and during the financial crisis, CLOs have suffered credit losses of less than 1%. Moreover, not one AAA or AA investor has ever suffered a credit loss. This is a better performance history than nearly any other asset class, including bonds to America’s most highly rated companies.