Return of the CLOs

Return of the CLOs

Collateralised loan obligations (CLOs) are re-emerging in the market. James Waddington, partner at Dechert, looks at the current trends in the market and considers the differences between CLOs 1.0 and CLOs 2.0.

Why have collateralised loan obligations (CLOs) re-emerged in the market?

It is a good investment product. It held up well throughout the financial crisis as opposed to collateralised debt obligations (CDOs), with sub-prime mortgage loans, which represented very poor credit. Also we are in a very low interest rate environment. People are looking for something with a better return.

Who is investing in the CLO market?

We are seeing a broad range of investors now. More people are coming into the market and, in part, that is due to them being a good risk-adjusted return. We are seeing banks, insurers, pension funds, hedge funds etc investing—a broad spectrum of investors.

Are there any restrictions on who is investing and issuing CLOs?

There are the normal securities law restrictions but nothing out of the ordinary. For example, you need to put in a minimum amount to buy a bond—obviously, a retail investor is probably not the right person to buy this.

The EU risk retention rules have had an impact on who can issue. You are required for an originator sponsor or original lender to hold 5% of any deal—5% of a $300m deal is a lot of money. Not everyone can do it and so there are s

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About the author:

Meet Emma:

1.Banking and finance lawyer with experience in derivatives, debt capital markets, securitisation and structured finance in London and Paris

2.Likes ballet, playing the harp and holidays

3.Thinks the law is always changing!

Emma trained and qualified at Allen & Overy LLP and worked in their derivatives and structured finance teams in London and Paris.  She then joined the foreign exchange prime brokerage legal team at Deutsche Bank before spending 4 ½ years with Crédit Agricole CIB advising the fixed income and derivatives desk.