Bloomberg has a primer on the market for leveraged loans and collateralised loan obligations (CLOs). This illustration of a CLO that converted underlying junk loans into investment grade securities is stunning.
Unlike the more famous collateralised debt obligations (CDOs) which cover a wide array of debt, CLOs are made from leveraged loans. The market for leveraged loans has topped $2 trillion, and in the US 60% of loans to sub-investment grade firms (leveraged loans) end up as CLOs. The money raised by leveraged loans have been used to finance private equity buyouts, pay dividends and refinance borrowings.
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