Within the credit universe, collateralised loan obligations (CLOs) have garnered increased attention lately by investors and the financial press. In part, the growing focus by the media reflects the significant role that the structures play as investors in the loan market: CLOs accounted for 71.4% of primary loan demand as at 31 December 2019, up from 50.0% in the 10 years earlier.¹
In turn, investors increasingly have taken notice of CLOs for the attractive investment advantages that they offer in today's evolving investment environment, which has been characterised by higher volatility and lower yields across global financial markets. Notwithstanding the increased attention, the complexity associated with CLO securitisation has meant that the structures remain poorly understood, as misconceptions related to their risk persist. Within asset-backed securities (ABS), CLOs are a niche area where products are slightly more bespoke and receive less attention from tradtional ABS investors. That lack of coverage can, however, create an alpha opportunity for managers with the right skill set and specialist expertise. At Eaton Vance, we have deep experience in this asset class as CLO managers for nearly 20 years and investors in third-party CLOs for 15 years. In our view, the CLO securitisation structure is durable not in spite of its complexity, but precisely because of it. In this paper, we explain the basics of CLO securitisation, securitisation's role as an anchor to stability and what the potential advantages of CLO investing include.
¹Source: S&P/LCD. As at 31 December 2019
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Source of all data: Eaton Vance, Citibank Velocity, Macrobond, S&P/LCD, an offering of S&P Global Market Intelligence. Data as at 31 October 2020, unless otherwise specified.
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