CLOs and CLO Closed-End Funds
To begin with, CLO stands for collateralized loan obligation. It is essentially a form of "structured security." CLO Closed-End Funds such as Eagle Point Credit or Oxford Lane Capital Corp. In recent years, it has gained popularity due to its features in the current low-interest-rate environment.
Using Eagle Point Credit as a prime example, the most extensive holdings of this CLO fund are CIFC Funding 2015-II, Ltd. 15.16%, and Barings Income Nt Ltd 2018-I FRN. Unlike a traditional fixed income product such as a bond fund, which owns the debt of a municipality or corporation. A CLO fund owns collateralized loan obligations. More specifically, it holds the securities issued by a CLO.
CIFC Funding 2015-II, Ltd. is not a company in a traditional sense. It is manufactured to hold non-investment grade, or "junk" (typically B to BBB rated), 1st lien senior loans secured. To a lesser extent. CLOs also invest in other investments such as 2nd lien loans and unsecured debt. In other words, the CLO purchases a variety of separately risky bank loans, but when bundled are theoretically safer, depending on the tranche.
Using municipal bond issuance as an example, bond offerings can raise funding for toll road construction. That bond offering issues various tranches of debt. When an investor purchases that toll road bond, it could be from a lesser risk tranche or a subordinated tranche that carries high risk but also attendant returns. The same thing occurs with the CLO.
CIFC Funding 2015-II, Ltd. raised proceeds from its issuance of both secured (debt tranche) and unsecured securities (equity tranche) to raise capital. After the requisite capital is raised, the CLO would purchase a portfolio of loans from banks to businesses. Furthermore, these loans are generally riskier types of loans.
It should be noted that until recently, most CLO issuances were not rated junk. However, their holdings were junk. To make things theoretically safer for the retail investor, CLO funds spread the risk further by owning a variety of CLOs. Eagle Point, for example, is a Fund.
However, it usually invests in equity tranches. That would make it a riskier CLO fund.
Institutional investors generally purchase CLOs. The average everyday investor should not own individual CLOs as they are too risky. If an investor owns CLO funds, such an investment should only be for a fraction of their portfolio. In short, even CLO funds are too risky to comprise a large portion of anyone's portfolio.
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If you’re a retail investor who invested in any CLO or concentrated CLO fund please contact us. If you were an administrator at a municipality, school district, pension fund, credit union, or community bank, or were "ratings constrained" in any way, please see below.CLO Downgrades
There has been a barrage of loan downgrades that will, in turn, prompt rating agencies to downgrade the debt and equity issued by the CLOs.
Moody's has downgraded about $22 billion worth of CLOs, which is about 1/5 of the CLOs rated by them. These CLOs are on a list earmarked for potential further downgrades. Losses on CLOs have increased dramatically. About 40% of those CLOs believed to have an investment-grade or non-junk rating. That is changing as many of these CLOs are now or will shortly become non-investment grade.
The biggest issue may be municipalities, school districts, pension funds, community banks, and credit unions. These entities are often constrained by agreements or charters that forbid investing in junk securities. When these securities fall below the threshold, they must be liquidated.
This creates two issues:
The first is a run on the market, which depresses prices further. Second, these entities will have to take principal losses that were not supposed to occur in the first place. That is a massive deal for a local administrator at a municipality or a trustee on a board that was assured they were investing something safe.
If your entity is in such a situation, please contact us on (866) 901-3874 for a free consultation by Shepherd Smith Edwards & Kantas experts. We have represented school districts, municipalities, credit unions, and retirement plans in the last financial crisis. The consultation is free, and we will put on a presentation to your board, if applicable, of what we uncovered and highlight all options available.Examples of CLO Funds:
- Blackstone/GSO Senior Floating Rate Term (BSL)
- Eaglepoint Credit Company (ECC)
- Highland Floating Rate Opportunities (HFRO)
- Oxford Lane Capital Corp (OXLC)
- Aberdeen Income Strategies Fund (ACP)
- OFS Credit Company Inc (OCCI)
- XAI Octagon FR & Alt Income Term Trust (XFLT)
- FS Global Credit Opportunities Fund
- FREMF 2019-KF60 C
- Barings Income Nt Ltd 2018-I FRN
- BRISTOL PARK CLO LTD 6.37%
- Battalion Clo 2015-9r FRN
- Octagon Investment Partners 40, Ltd.
- Madison Park Fund Xli, Ltd