Collateralized Loan Obligations: A Powerful New Portfolio Management Tool For Banks ~ Part 1

Banks throughout the world are increasingly utilizing a new asset securitization structure known as a "collateralized loan obligation", or "CLO", to meet their financial objectives. CLOs enable banks to sell portions of large portfolios of commercial loans (or in some cases, the credit risk associated with such loans) directly into the international capital markets, and offer banks a means of achieving a broad range of financial goals, including the reduction of regulatory capital requirements, off-balance sheet accounting treatment, access to an efficient funding source for lending or other activities, and increased liquidity. This article summarizes the benefits to banks of undertaking a CLO, discusses important rating agency and legal considerations affecting the structuring of a CLO, and describes the steps required to complete a CLO transaction.