How do collateralized loan obligations work?

Understanding CLO Collateral: Leveraged Loans

A portfolio of loans act as the collateral supporting a CLO. The proceeds of these loans are typically used by non-investment grade borrowers to support a range of activities, including mergers and acquisitions, stock repurchases, dividend payments, leveraged buyouts, or investment in new projects. Loans are provided by a group or “syndicate” of institutional lenders and arranged by an investment bank.

Most CLO collateral consists of senior secured loans, which have the first claim on all of the related company’s assets in the event of a bankruptcy and are intended to be the least risky investment in these companies. Loans carry floating-rate coupons typically benchmarked to the Secured Overnight Financing Rate (SOFR). Loans carry a number of covenants, including financial covenants that may restrict lender-unfriendly actions, and require compliance with certain credit metrics. The senior secured position of these loans has contributed to higher historical recoveries in default scenarios than those seen in the senior unsecured high-yield bond market.

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.

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