- The case for global AAA and AA CLOs is simple. As the senior-most, highest-rated tranches in the CLO capital structure, AAA and AA tranches benefit from strong structural protections and historically low defaults. These securities can offer attractive relative and absolute value for global fixed income investors seeking yield-enhancing investments and attractive risk-adjusted returns.
- Fundamentally, securitized products are an alternative means of financing assets. Investors at the top of the capital structure provide financing to equity investors at the bottom of the capital structure, and investors in the mezzanine tranches exist in between.
- Senior CLO tranches typically offer higher-than-average spreads when compared to sectors with similar credit quality as well as historically low credit migration risk.
- Active managers with strong leveraged finance and securitized credit research capabilities, along with structuring expertise, are well positioned to capture relative value opportunities and pricing inefficiencies across the global market for senior CLO tranches.
- Leveraged loans and collateralized loan obligations became a focal point in 2021 amid investors’ concerns about duration exposure and rising central bank policy rates. Given this interest, the following pages revisit the key attributes that make senior CLO tranches one of the more compelling asset classes in global fixed income.
- ESG considerations represent a transformative force in the industry. CLO tranche investors, with the appropriate capabilities, can utilize rich datasets and manager access to rate and potentially influence ESG factors across their investments. While the analysis may be complex or burdensome, investors with robust technology platforms and internal processes are able to differentiate between CLO managers, underlying portfolios, structures, and documentation.
Ronni Neeman, CFA, FSA
Head of CLO Research
DheeraJ Sharma, CFA