Investment opportunities: Collateralised loan obligations

CLOs offer long-term investors diversified floating-rate credit exposure, with senior tranches benefiting from structural subordination but all tranches remaining exposed to corporate defaults, liquidity and manager-selection risks.

• A CLO actively manages a diversified portfolio of leveraged loans, which are generally senior-secured and first-lien claims on highly indebted companies; their floating coupons can support income when short-term rates rise, but income can also decline when rates fall.
• The capital structure distributes loan cash flows through a waterfall from AAA debt to unrated equity, with junior tranches absorbing losses first; AAA securities typically represent about 65% of assets, AA–BBB tranches 22%, and BB and equity the remainder.
• The global CLO market reached $1.5 trillion in 2026, while CLOs provided around 70% of demand for leveraged loans; CLO debt has historically offered a spread premium over similarly rated corporate bonds because of complexity, lower liquidity and a specialised investor base.
• Diversification across issuers and sectors has historically helped CLO debt tranches record lower realised default rates than similarly rated corporate bonds, but the portfolios have around 13% exposure to software and remain vulnerable to defaults, downgrades and weak recoveries.
• Investors can hold tranches directly or access them through active or passive funds, with selection focused on collateral managers’ underwriting, trading and portfolio-construction skills, as well as concentration, liquidity, diversification, market access and fees.

Takeaway: CLOs can complement fixed-income portfolios through potentially attractive spreads and floating-rate income, but investors must weigh structural complexity, corporate-credit losses, liquidity risk and the quality of the underlying CLO managers; diversification does not eliminate the risk of loss.