Put simply, a collateralized loan obligation is a portfolio of leveraged loans that is securitized and actively managed as a fund. Each CLO is structured as a series of tranches that are interest-paying bonds, along with a small portion of equity.
CLOs offer insurance investors multiple potential benefits, both on their own and versus other fixed income sectors.
Over the long term, CLO tranches have significantly outperformed other corporate debt categories, including bank loans, high yield bonds, and investment grade bonds.1
1Source: JP Morgan, Bloomberg Barclays as of 27 January 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Any views represent the opinion of PineBridge Investments LLC, are valid as of the date indicated, and are subject to change.
CLO spreads typically are wider than those of other debt instruments, reflecting CLOs’ greater complexity, lower liquidity, and regulatory requirements. Compared with other higher-yielding debt sectors – notably high yield and investment grade corporates – CLO spreads are especially compelling.
Leveraged loans and their CLO tranches are floating-rate instruments, priced at a spread above a benchmark rate such as Libor, Euribor, or SOFR. As interest rates rise or fall, CLO yields will move accordingly, and their prices will move less than those of fixed-rate instruments. These characteristics can be advantageous to investors in diversified fixed income portfolios.
As demonstrated by a variety of key metrics – default rate, recovery rate, Sharpe ratio, tracking error, beta, time to maturity – CLOs present less risk than corporate debt and other securitized products do. Investment grade CLO tranches benefit from a higher Sharpe ratio compared with most other credit sectors, while non-investment-grade can be employed opportunistically.
Of the approximately $500 billion of US CLOs issued from 1994-2009 and rated by S&P (vintage 1.0 CLOs), only 0.88% experienced defaults, and an even smaller percentage of those, 0.35%, were originally rated BBB or higher. If we consider those deals rated by Moody’s, there have been zero defaults on the AAA and AA CLO tranches across all vintages (vintages 1.0 through 3.0) as of January 2021.2
2Source: S&P Global Ratings as of 2 August 2018. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
CLO spreads versus comparably rated corporate bonds
Source: JP Morgan, Bloomberg Barclays as of 27 January 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Any views represent the opinion of PineBridge Investments LLC, are valid as of the date indicated, and are subject to change.
Our team of professionals includes senior leadership that has been in place for nearly 20 years, as well as credit analysts, most of whom have been with us for at least 10 years.*
We are differentiated by an experienced team that has been serving the insurance industry across a variety of niche fixed income asset classes.
In fixed income, our multi-billion-dollar portfolio is invested across the spectrum of developed and emerging markets, investment grade debt, leveraged finance, and multi-sector strategies.
* As of 31 December 2020.
This information is for educational purposes only and is not intended to serve as investment advice. This is not an offer to sell or solicitation of an offer to purchase any investment product or security. Any opinions provided should not be relied upon for investment decisions. Any opinions, projections, forecasts and forward-looking statements are speculative in nature; valid only as of the date hereof and are subject to change. PineBridge Investments is not soliciting or recommending any action based on this information.
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