Collateralized loan obligations (CLOs) are securitization vehicles that have traditionally been backed by pools of “bank loans”—senior-secured corporate loans with floating rate coupons. CLOs generally comprise a diverse pool of loans and serve as a key secondary-market liquidity source and structured finance tool for lenders. The transactions are structured with a variety of tranches carrying varying risks and returns. Cash flow received from the underlying loans is distributed to investors in the CLO via a waterfall: Investors in the highest-rated tranche are first to receive cash flow distributions and investors in the most junior tranche are last. Typically, CLOs are actively managed, often by a party affiliated with the primary loan originator.
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