Due to the type of CLOs and the underlying investments involving bank loans and other similar investments, companies registered with the SEC must adapt the basic rules of the Investment Advisers Act 206 (4) -7 compliance program to reflect the activity and activity of their business. CLO executives work independently and in a context where transactions are subject to different credit and performance risk metrics, as defined in the awareness of the CLO and collateral management agreements. “The credit risk of a OLC depends on the underlying assets within the portfolio. In the case of “traditional” CLOs, the collateral pool consists mainly of investment and front-line bank loans, priority bank loans, largely syndicated (generally at least 90% of the total portfolio) and may include a predetermined portion of other types of assets, such as double debt loans (which are heavily financed by borrowing) , unsecured bonds and sme loans. Some CLOs consist mainly of sme loans as underlying collateral. 5 Some argue that a CLO is not so risky. A study by Guggenheim Investments, an asset management company, showed that, from 1994 to 2013, default rates were significantly lower than those of corporate bonds. However, these are demanding investments and, as a general rule, only large institutional investors buy tranches in a OLC. In other words, size companies, such as insurance companies, quickly purchase priority debt tranches to ensure low risk and stable cash flow. Investment funds and ETFs generally buy bond tranches at the junior level with higher risk and higher interest payments. If an individual investor invests in an investment fund with junior debt tranches, that investor assumes the risk of proportional default. A CLO is an actively managed tool: managers can – and do – buy and sell individual bank loans in the underlying collateral pool to make profits and minimize losses. In addition, most of a OLC`s debt securities are supported by quality guarantees, making liquidation less likely and making it more able to cope with market fluctuations.
CLOs are structured vehicles that issue long-term debt and equity to finance the purchase of a portfolio of priority secured bank loans from a large number of borrowers, including more than 200 issuers. The contract of a CLO (withdrawal) consists of an agreement between the issuer and the agent. The agent is a bank whose mission is to represent the holders of CLO2 bonds The CLO2 the OLC hires the administrator subject to a collateral management agreement. The debt securities issued by the OLC are divided into separate tranches. “Each tranche of CLO has a different priority in terms of the demand for cash flow distribution and the risk of a loss of the underlying collateral pool. Cash flows begin with the priority debt tranches of the CLO capital structure and are paid to the lowest equity tranche. 3 Compliance policies and procedures should be tailored to the management of CLOs and to the recognition of key “hot button” issues, risks and differences that distinguish LCOs from private funds, hedge funds or traditional consultants.