CLOs are vehicles for investing in leveraged loans: they combine some characteristics of a fund and some of a securitisation.
Leveraged loans are debt instruments issued by high yield companies, that is, those with relatively high levels of debt (see chart).
A CLO has two different kinds of investor: those who buy its “equity” and those that invest in the various tranches of debt it issues, also known as CLO notes.
The CLO note provides its equity investors with leverage which is committed for the life of the deal. CLO noteholders benefit, in turn, from features which protect them if the CLO’s investments perform poorly.