The Senior Debt Evolution

Abstract

The relative risk-return profile of senior debt has increasingly attracted capital markets funding sources, which in turn have driven increased sophistication in the evolution of securitization structures including the collateralized loan obligation (CLO). Over the past decade, the CLO structure has evolved from a rigid securitization structure modeled after corporate bond transactions to a highly functional investment vehicle adaptive to the realities of the senior debt market. This article compares the fundamental legal parameters, including related tax issues, of two structured vehicles that utilize senior debt as collateral: the cash flow CLO structure and the synthetic total return structure. The article further examines the relative risks and motivations of each of those structures from the perspective of the senior debt collateral manager and the capital markets investor.