What Is a Collateralized Loan Obligation?
A collateralized loan obligation (CLO) is a portfolio of predominantly senior secured loans that is securitized and actively managed. Each CLO issues a series of floating rate bonds, along with a first-loss equity tranche. The tranches differ in terms of subordination and priority—and, thus, lowest to highest in order of riskiness. Major rating agencies, such as Moody’s and Standard & Poors, provide ratings on the investment risk of these individual tranches as they do within other areas of fixed income.
Cash flows from the underlying loans of a CLO are used to pay interest on the debt tranches, and get distributed based on a “waterfall” whereby cashflows are paid sequentially starting with the senior-most tranche until each tranche has been paid its full distribution. Equity-tranche holders receive the residual distributions, net of costs. Principal distributions are similarly applied first to the most senior tranches.
Volta Finance Ltd (LON:VTA) is a closed-ended limited liability company registered in Guernsey. Volta’s investment objectives are to seek to preserve capital across the credit cycle and to provide a stable stream of income to its Shareholders through dividends that it expects to distribute on a quarterly basis.