What are some risks of investing in CLOs?

[Music] foreign some of the risks that come with a clo are default risk downgrade risk both in the assets and the liabilities and volatility in the greater Market the clo Market has grown significantly over time but the share of the loan Market that's dominated by Clos has grown as well 40 percent of the loan Market was made up of Clos a decade ago today it's in excess of 70 percent so with a structure like a clo where the managers are rating sensitive changes in ratings of the underlying loans in the market May create a little bit of a herd mentality in that maybe managers want to sell out of loans at the same time and it becomes a crowded trade which can create a little more volatility in the market in particular where loans get downgraded one of the risks of Clos for the junior investor is you're taking a magnified or less covered exposure to the underlying loans which could result in magnified losses for the most Junior investor for the more senior investors the risks aren't really connected to magnified risks or even risk of loss but illiquidity or the fact that the Clo's can be called and as soon as one or two years from their creation called means paid back or they can be extended for six seven eight years so as a senior lender you you may have a position where you could get your money back very soon or it could take a while for you to get your money back and that might be a little difficult to handle if you have liabilities on the other side we're talking about below investment grade Securities in the underlying portfolio of a clo and Below investment grade means higher risk and therefore the asset manager has to manage the risks of the underlying portfolio of each Credit in each industry and the volatility and the market therefore when you're avoiding defaults but more importantly avoiding losses you maintain the Integrity of the portfolio foreign

Channel: Oaktree Capital

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Id: Igt5a5fetGY

Length: 2min 51sec (171 seconds)

Published: Thu Mar 02 2023