Structural and Analytical Considerations: How
to Effectively Analyze a CLO

Abstract

The new issue market has reopened in the U.S. for collateralized loan obligations (CLOs), and there are now a variety of vintages with different structural features. In this environment, the panel considered some key questions that anyone analyzing a CLO should address: structural changes, the equity call, fundamental versus market evaluation, and how to analyze the collateral manager. The structural changes since 2008, known collectively as CLO 2.0, can be put into four categories: back to basics, regulatory changes, structural clarifications, and new features. Among the specifics under these categories, the panel discussed post-investment-period tests and restrictions. “Amend to extend” has been an important change. The equity call is possibly the most discussed element of a CLO valuation; whether or not a deal is likely to be called will have a dramatic impact on the duration of bonds and is therefore a key question for investors. Before the financial crisis and downturn, the market and fundamental analysis were different. Now it is hard to distinguish between them because most investors are examining the fundamentals in detail and “looking under the hood.” The three sources of pricing that are used most frequently are broker quotes, fundamental analysis, and third-party services. Some of the factors to consider in evaluating a collateral manager are equity returns, volatility in overcollateralization cushions, number of trades in the portfolio, actual trades made during the credit crisis, who makes decisions and how, ability to monitor deals and IT infrastructure, work-out expertise within the firm, and availability of managers to answer investors’ questions.