Collateralized Loan Obligations are now an established asset class, but Credit Risk Sharing is perhaps less well understood. We think it’s time for investors to appreciate what both can offer portfolios.
Over the past 30 years, few parts of the capital markets have grown as quickly as leveraged finance. Following years of volatile lending conditions in the 1980s and 1990s, private-equity sponsors and their investment-banking colleagues realised they needed to develop a dedicated, capital markets solution to their acquisition-financing needs to reduce their dependence on commercial-bank and high-yield bond funding channels. In the mid-1990s, the first broadly syndicated loan securitisations were issued. 10 years later, on the precipice of the global financial crisis, the Collateralised Loan Obligation market had emerged as a major channel for leveraged buyout finance.
The GFC, however, was a turning point. First, minimum capital requirements – especially for tangible equity capital – increased substantially. Second, for US banks and the US branches of foreign banks, capital charges were applied based on the credit risk of the borrower. For corporate loans, minimum capital charges for leveraged (B and BB rated) companies exploded.
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.
