A Collateralized Loan Obligation (CLO) is a financial instrument where loans are pooled together and sold to investors. These securities are backed by a collection of loans, similar to how Collateralized Mortgage Obligations (CMOs) are backed by mortgages. However, in the case of CLOs, the underlying debt consists of various loans rather than mortgages.
The process involved in CLOs is called securitization, which means combining assets to create a tradable security. Private equity firms often use CLOs to facilitate leveraged buyouts (LBOs), and these CLOs are supported by corporate loans that typically have low credit ratings.
Investors take on most of the risk if borrowers default and cannot make regular debt payments on the underlying loans. Since investors have to take on default risk, they are provided with diversification and higher-than-average projected returns.
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.