Why we believe CLO junior tranches can be compelling investments:
CLOs Offer Exposure To A Diversified Portfolio of Leveraged Loans
CLOs hold leveraged loans across 200+ broadly syndicated issuers in over 30 industries. These senior-secured loans have historically demonstrated average default rates below those of high yield bonds and average recovery rates above those of high yield bonds.
Structural Features of CLOs Can Mitigate The Risks of CLO Junior Tranches
CLOs allow managers to actively manage the underlying loan portfolio. This can allow them to build par and buffer against the impacts of defaults – a particularly important feature for the first loss equity tranche.
As Floating Rate Products, CLOs Provide A Hedge Against Inflation
Since leveraged loans are indexed to floating rates, CLO investments can benefit from a rising rate environment.
Cash Flow Profiles Can Complement Other Asset Classes
CLO equity investments generally can produce high initial quarterly cash flows, which can complement the J-Curve. In contrast, CLO mezz investments provide quarterly coupons indexed to floating rates, with a return of par as the deal amortizes.