How is a collateralized loan obligation (CLO) structured?

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AcadiFi · Accepted Answer

A CLO is a structured vehicle that pools 150-300 leveraged loans and issues tranches of securities backed by the loan portfolio cash flows. The structure is a cash flow waterfall from senior to subordinate. Typical structure for a $500M CLO: - AAA tranche: 62% ($310M), SOFR + 130 bp - AA tranche: 8% ($40M), SOFR + 180 bp - A tranche: 6% ($30M), SOFR + 220 bp - BBB tranche: 6% ($30M), SOFR + 320 bp - BB tranche: 5% ($25M), SOFR + 600 bp - Equity (residual): 13% ($65M), variable returns Cash flow waterfall: 1. Senior fees (trustee, admin, manager base fee). 2. AAA interest, then AA, A, BBB, BB interest in sequence. 3. Overcollateralization (O/C) and interest coverage (I/C) tests. If any tranche fails, excess cash diverts to pay down senior notes instead of flowing to equity. 4. After all tests pass and debt interest is paid, remaining cash flows to equity. 5. Management incentive fee (typically 20% of equity returns above an 8% hurdle). ```mermaid flowchart TD A[Loan
Portfolio] --> B[CLO
SPV] B --> C[AAA 62%] B --> D[AA 8%] B --> E[Mezz] B --> F[Equity 13%] ``` The reinvestment period (typically 5 years) allows the manager to actively trade loans. After that, the CLO amortizes. Average CLO life is 7-10 years.

How is a collateralized loan obligation (CLO) structured?

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