January 2024

A 101 on CLOs

Insights into essential aspects of collateralized loan obligations (CLOs), including their makeup, history, evolution, structure, return profiles, and utilization.



It is important to first establish what a collateralized Loan Obligation (CLO) is not. A CLO should not be confused with a collateralized debt obligation (CDO). The term CDO, for many, is synonymous with the Great Financial Crisis (GFC) of 2008. CDOs were supported by the sub-prime residential loan market and as housing capitulated, so too did the CDO market, resulting in a horrific outcome for investors.

However, the CLO market fared substantially better through the recessionary period of 2008/2009. According to data from Moody’s rating agency, there have been zero defaults since 1993 (even throughout the GFC) within the higher rated AAA to A CLO tranches. Additional data from the Structured Finance Association shows that out of 11,409 CLO tranches rated by S&P between 1994 and 2019, only 40 tranches, or 0.004% of the rated tranches, have defaulted.