CLOs Revisited – Ratings, Risks, and Returns (Second of a Series)

“The world has put all its Covid eggs into the vaccine basket. There is no Plan B.” – CLO manager.

What happened to CLOs during Covid? We asked a number of experts on the topic, including rating agency friends and top credit managers. Here’s a summary of their opinions:

First, because CLO assets represent roughly 70% of the leveraged loan market, the health of one directly impacts the health of the other. When the world came to a stand-still last March, as our own CLO manager, Kelli Marti, told us, “everyone looked first to their health of their portfolios. The key was preserving the value of the underlying collateral.

“Two things particularly occupied our time then: triple-C exposure and OC cushions,” Kelli continued. “If the highest-risk assets exceed permitted levels, it hurts the vehicle’s over-collateralization ratios, which measure underlying asset quality. Then fund flows have to be redirected, suspending payments to the lower debt and equity tranches.”