CLO Portfolio Risk Mitigation

What mechanisms are in place to protect the CLO?

So, how can we protect the debt?

• Controlling the quality of the underlying assets
• Accelerating the repayment of the debt, when things don’t go to plan. The quicker you get repaid, the lower your risk of not getting repaid

If things go wrong you can have defaults in your assets and resulting losses, leaving you with insufficient principal to repay your debt. Or you can simply have asset deterioration, where the quality of your assets gets worse. In the pool, there may well be assets that have not defaulted yet, but they have got bad enough that rating agencies now view them as more likely to default. You can also have shortfalls of interest, your assets not yielding enough to cover the interest payments due on your debt.

What defines a good portfolio?

1. Assets in the portfolio need to be of  good credit quality, otherwise, they can default
2. The asset pool needs to be diversified
3. The interest produced from the assets, must be sufficient to pay the interest due on the Debt
4. Your underlying assets must repay promptly enough, to redeem your debt as scheduled

What are Portfolio Profile Tests?

Mechanics are in place, to ensure that throughout the life of the CLO, the debt is protected. This is done by the portfolio profile tests, which make sure the portfolio manager maintains a high quality, diversified portfolio and the diversion tests, where interest payments and scheduled principal payments are used to redeem the Notes early.