FAQ

FAQ

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 Moody’s, 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. 


What They Are Saying

  • “[W]e should be mindful of the fact that CLOs provide financing to businesses that cannot access the debt markets affordably, if at all. For many of these companies term loan financing is their only recourse.” (Testimony before the House Financial Services Committee on behalf of the U.S. Chamber of Commerce, “The Impact of the Volcker Rule on Job Creators Part 1,” January 15, 2014)

    David Robertson, Treasury Strategies, Inc.

    “While they may not have a high profile, CLOs provide a valuable function that our recovering economy cannot do without” (Floor speech during consideration of “Restoring Proven Financing For American Employers Act,” Congressional Record, p. H3257, April 29, 2014)

    U.S. Representative Scott Garrett (R-NJ)
  • “CLOs are important tools to expand credit availability.” (Rob Blackwell, Volcker Fix Leaves Some Small Banks Out in the Cold, “American Banker,” January 16, 2014)

    Jaret Seiberg, Guggenheim Securities

    “There has to be a revisitation of the regulation that had been introduced in the past few years about Asset Backed Securities to eliminate some of the undue discriminations toward this specific product when this product is simple, real and transparent” (Jim Brunsden, Basel Pushes Risk Realism as Draghi Prepares to Buy ABS, “Bloomberg Business,” June 11, 2014)

    Mario Draghi, President of the European Central Bank
  • “Collateralized loan obligations, or CLOs, have proven to be a critical source of funding for U.S. businesses over the last 20 years.” (Floor speech during consideration of “Restoring Proven Financing For American Employers Act,” Congressional Record, p. H3258, April 29, 2014)

    U.S. Representative Andy Barr (R-KY)

    “[CLOs are] an important part of the economy overall and the single-largest lender to corporations beside banks.” (Stephanie Armour, Lenders, Companies Balk at Proposed Loan Rules, “The Wall Street Journal,” November 28, 2013)

    Josh Terry, Highland Capital Management LP
  • “[T]he historic default rate of CLOs is under 1.5%, and the loss given default much lower than that. These are assets that withstood the stress of the financial crisis and continue to trade at or close to par.” (Testimony before the House Financial Services Committee on behalf of the U.S. Chamber of Commerce, “The Impact of the Volcker Rule on Job Creators Part 1,” January 15, 2014)

    David C. Robertson, Treasury Strategies, Inc.

    “CLOs represent a vital source of credit and remain an important financing resource for small to mid-size businesses across the country. Losing or restricting CLOs will make it not only harder to access capital, but it will make the loan process more expensive, ultimately reducing funds needed to build businesses and stifling future economic growth.” (Joe Dutra, Congress can help small Reno businesses with taxes, “Reno Gazette-Journal,” March 23, 2017)

    Joe Dutra, CEO of Kimmie Candy
  • “CLOs are primarily used by small, midsize, or challenged businesses as a non-investment grade vehicle.” (Letter to The Honorable Andy Barr, March 10, 2014)

    R. Bruce Josten, U.S. Chamber of Commerce

    “The reduced financial burden would allow less-capitalized managers to comply with the retention rules and issue new CLOs, and could allow other managers to issue a greater number of CLOs without external financing.”

    Lana Deharveng, Senior Analyst at Moody's
  • “Having grown over the course of time, CLOs provide business financing to companies in 47 states and the District of Columbia that collectively employ over five million Americans. … A broad swath of corporate America participates in this market, including companies from the health care, energy, retail, entertainment, and telecommunications sectors, to name just a few.” (Testimony to the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises, “The Dodd-Frank Act’s Impact on Asset-Backed Securities, February 26, 2014)

    Tom Quaadman, Center for Capital Markets Competitiveness

    “CLOs are products that help provide large amounts of credit to small businesses. They are debt securities, and they performed well through the greatest financial crisis of our time, and they continue to perform well.” (House Financial Services Committee Hearing, “The Impact of the Volcker Rule on Job Creators, Part II,” January 15, 2014)

    U.S. Representative David Scott (D-GA)
  • “CLOs performed extraordinarily well, yet risk retention rules don’t seem to acknowledge the fact that these securities, which performed well, helped finance more than 1200 companies that employ more than 600 million people.” (House Financial Services Committee Hearing, “The Impact of the Dodd-Frank Act and Basel III on the Fixed Income Market and Securitizations”, February 24, 2016)

    U.S. Representative Ann Wagner (R-MO)

    “We need a healthy leveraged loan market. The country needs it to finance capital investment.” (Glen Fest, Babson CEO Finke: CLOs Often Unfairly Judged, “Asset Securitization Report,” April 24, 2014)

    Tom Finke, Babson Capital Management
  • “The asset-backed market matters because it fuels lending to the real economy.” (Jody Shenn, It’s Like 2009 for Some Asset-Backed Securities Rattled by the Fed, “Bloomberg Business,” August 17, 2015)

    Jody Shenn, Bloomberg Business

    “The Barr-Scott bill’s lower risk retention requirement would significantly reduce the financial burden for managers bringing new deals to market. This would encourage new CLO issuance, thereby adding liquidity to the leveraged loan market. It would also formalize objective credit criteria for qualified CLOs, which in turn would discourage the issuance of riskier types of CLOs.”

    Lana Deharveng; Senior Analyst, Moody's

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