Collateralized Loan Obligation (CLO)

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Definition of 'Collateralized Loan Obligation (CLO)'

A collateralized loan obligation (CLO) is a type of structured finance product that is backed by a pool of loans. CLOs are typically issued by investment banks and structured as a special purpose vehicle (SPV). The SPV issues debt securities, which are then used to purchase the underlying loans. The interest and principal payments from the loans are used to pay back the debt securities.

CLOs are often used to securitize illiquid assets, such as leveraged loans. This allows investors to gain exposure to these assets without having to purchase them directly. CLOs can also be used to provide liquidity to the market for leveraged loans.

There are two main types of CLOs: senior tranches and subordinated tranches. Senior tranches are the first to receive payments from the underlying loans. Subordinated tranches receive payments only after the senior tranches have been paid in full.

CLOs are often rated by credit agencies. The rating of a CLO depends on the credit quality of the underlying loans, the structure of the CLO, and the level of subordination.

CLOs can be a complex investment. Investors should carefully consider the risks before investing in a CLO. Some of the risks associated with CLOs include:

* Credit risk: The underlying loans in a CLO may default, which could lead to losses for investors.
* Interest rate risk: The interest rate on the debt securities issued by the SPV may fluctuate, which could affect the value of the CLO.
* Liquidity risk: CLOs can be illiquid, which means that it may be difficult to sell them quickly if needed.

CLOs can be a good investment for investors who are looking for high yields. However, investors should be aware of the risks involved before investing in a CLO.

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