A Glossary of CLO Attributes
BSL: see broadly syndicated loans.
Broadly syndicated loans: Typically, a callable bullet maturity loan to a highly leveraged borrower where an agent or arranging bank leads a group of banks in offering credit. Often distinguished from a middle market loan.
CBO: see Collateralized Bond Obligation
CLO closing date: see CLO pricing date.
CLO effective date: the date on which the initial CLO loan portfolio is fully accumulated. As a practical matter, the portfolio needs to hit targets for par balance, weighted average spread, weighted average rating factor, diversity score, recovery value and concentration limits or else rating agencies will not rate the debt.
CLO pricing date: the date on which a CLO sets the final terms for issuing debt and equity, including the margin over SOFR, LIBOR or other debt index. The CLO manager closes any warehouse financing used to accumulate leveraged loans. The CLO begins accruing debt interest expense on the pricing date and may continue to build a leveraged loan portfolio until the CLO effective date.
CLO 1.0: Generally, CLOs issued before 2011 when subordination ran below current levels, deal leverage ran higher and debt spreads priced tighter.
CLO 2.0: Generally, CLOs issued in 2011 or beyond.
Collateralized Bond Obligation: A type of collateralized debt obligation that includes high yield bonds and sometimes loans as collateral.
Control equity: An investor in a sufficient amount of a CLO’s equity to control decisions about when to refinance CLO debt or reset broader elements of the CLO structure.
Coverage tests: Tests of CLO loan performance such as the Overcollateralization Test, Interest Diversion Test, Interest Coverage Test. If a CLO is failing a coverage test, cash is diverted to protect senior classes.
Discount margin: The spread over a floating index that discounts a CLO’s projected cash flows to the current price.
Diversity Score: A Moody’s metric that measures the diversity of a CLO loan portfolio based on number of industries, number of loans and par value.
Margin: A fixed amount of additional interest or spread paid each period on a loan or debt indexed to a floating benchmark such as SOFR or LIBOR
Middle market loan: A callable bullet maturity loan typically to a highly leveraged borrower made by a single lender or small club of lenders. Often distinguished from a broadly syndicated loan.
MML: see middle market loan.
Moody’s rating factor: A number assigned to each loan in a CLO. The number reflects Moody’s assumed default rate over 10 years, expressed as a decimal, multiplied by 10,000.
NAV: see net asset value.
Net Asset Value: The value of CLO equity assuming immediate liquidation of a CLO loan portfolio and CLO debt.
OC Cushion: The difference between the overcollateralization level on a CLO class and the OC Test trigger.
Par build: anything that builds the par value of a CLO loan portfolio. That could include buying a loan at $100-00, selling it for a higher price and reinvesting the proceeds in a new loan with a larger notional balance priced at $100-00. Because a CLO will recognize the par value of a loan purchased below par, par build could also involve selling a loan at $100-00 and buying a new loan with a larger notional balance priced at $95-00. On the new discount loan, the CLO will recognize the full par amount despite the discount price.
Payment-in-kind: loans or securities that, under certain circumstances, can pay investors in additional debt instead of interest.
PIK: see payment-in-kind.
Quality tests: Tests of CLO loan quality such as Weighted Average Spread Test, Weighted Average Life Tests, Diversity Test, Maximum Rating Factor Test, Minimum Weighted Average Recovery Rate Test and Minimum WAC Test. If a CLO is failing a quality test, the manager typically can only trade to improve the failing metric, but no cash flows are diverted.
Ramp-up end date: see CLO effective date.
Recovery value: rating agency estimate of the amount of principal recovered on a loan in the event of default.
WARF: see weighed average rating factor.
WAS: Weighted average spread
Weighted Average Life Test: Measures the maximum weighted average life of a CLO loan portfolio to limit the risk of a portfolio maturing after the maturity of the CLO debt. A WAL test steps down as a CLO ages and often has a floor of three or four years.
Weighted average rating factor: the average Moody’s rating factor of a portfolio of loans with each factor weighted by the par amount of the corresponding loan. Some CLOs use the Moody’s Corporate Family Rating, which may be one to two notches lower than a first lien senior secured loan, when calculating WARF.
Weighted average spread: the average margin over a floating index offered by a portfolio of loans with each margin weighted by the par amount of the corresponding loan.