Talking Shop: Investing in Collateralized Loan Obligations

# Capital Markets

# Investment Management

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Member question: “Have any members considered/evaluated adding [collateralized loan obligations] to their investment portfolio in the current environment?

“While we’ve had CLOs in the portfolio in the past, it’s something that hasn’t been actively pursued in recent years and we are dusting it off for evaluation.”

Peer answer 1: “We have been investing in CLOs since Q2, almost exclusively in the AAA space, but we have authorization to do AA. Spreads are tight, but they are a good option to park cash and pick up some yield without taking any more duration or mortgage risk.”

Peer answer 2: “We started investing in CLOs at the end of 2020 for similar reasons to those [Peer 1] mentioned: taking on less duration and mortgage risk. We have authorization to invest down to the single-A level but typically try to reduce risk weighed assets so we only go that low if the spreads/credit look good and risk weights aren’t too high.

“Much if not all of the AA bonds we purchased are 20% risk-weighted. CLOs make up about 12% of our portfolio now.”

Peer answer 3: “We like CLOs for all of the reasons mentioned above. I leveraged this asset in a prior life and it performed very well in a similar rate environment. With that said, [there are] definitely some hurdles to get folks comfortable with this asset class, but it’s on our radar.”

Peer answer 4: “We are looking at CLOs now and will take it to the investment committee for evaluation.”