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Understanding collateralized loan obligations

What Is a CLO?

A collateralized loan obligation, or CLO, is a structured finance security that is collateralized by below investment grade (typically B to BBB rated) broad market first lien senior secured loans with smaller allocations to other types of investments including second lien loans and unsecured debt. CLOs issue debt and equity (also referred to as mezzanine or subordinated tranches), and the CLO manager uses the resulting proceeds to acquire a diverse portfolio of bank loans, typically in the range of 150 to 250 individual loans, or more.

Growth of the CLO Market

Following the subprime mortgage crisis and resulting Great Recession, CLO issuance was virtually non-existent during 2008 and 2009. However, a combination of rising interest rates and below-trend default rates in 2010 resulted in exponential growth for the CLO market. The CLO issuance market remains robust and healthy, heading into early 2020.  2019 new CLO issuance of $118 billion declined 8 percent vs. 2018 levels, although 2018 new issuance was a record $125 billion.

Volta Finance Limited (LON:VTA) is a closed-ended limited liability company registered in Guernsey. Volta’s investment objectives are to seek to preserve capital across the credit cycle and to provide a stable stream of income to its Shareholders through dividends that it expects to distribute on a quarterly basis.

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Disclaimer: Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional.