The EU highlights concerns for CLO ratings in the Covid-19 era

One of the most important and heavily utilised sectors of the asset-backed securities marketplace is the collateralised debt obligation (CDO) product sector. These products are securities which are backed by a pool of diversified assets, and they may be known as CBOs when relating to bond obligations, or CLOs when relating to loan obligations. ¹ The EU, through the European Securities and Markets Authority (ESMA) and its recent Thematic Report into CLO credit ratings affecting the bloc, ² focuses on CLOs which it describes as “securities backed by portfolios of loans to highly leveraged businesses that are typically rated in the non-investment grade category”. As with all CDOs, the underlying loans are divided into tranches, with each tranche conveying varying risk/return characteristics. The division is important because, quite often, investors or financial entities are constrained to only invest in certain tranches.