In practice
A CLO is run by a collateral manager, who can trade the loan pool within limits set in the indenture. Those limits include a reinvestment period, rating-based caps and coverage tests; if a test fails, cash flow is diverted from the equity to repay the senior notes. Tranches are rated from AAA down to BB. CLOs are often confused with CDOs, the pre-2008 structures that often pooled mortgage securities.
An example
Round numbers, not a real fundSay a CLO owns $500 million of loans. It sells safer slices to cautious investors at lower yields and the riskiest slice, the equity, to investors seeking higher returns.
Why it matters
CLOs are among the biggest buyers of leveraged loans, so their demand moves lending markets.
In the news
Recent stories that use the termA definition, not advice; where usage varies the entry says so. Something wrong? Tell the desk.