Understanding Collateralised Loan Obligations (CLOs)
The European collateralised loan obligation (CLO) market has been steadily growing in recent years, now sitting at around EUR250bn in size. Historically the preserve of institutional investors looking for yield enhancement, regulatory changes mean the asset class is now accessible to a much broader range of investors, who can benefit from the potential of higher yields and diversification from traditional fixed income.
Explore how you can access CLOs through Janus Henderson ETFs
A high-quality, floating rate active ETF offering enhanced yield over investment grade corporates.
A high-quality, floating rate active ETF offering enhanced yield over investment grade corporates.
Hear from the team
Whether you're new to CLOs or looking to deepen your understanding, our resources help you explore how CLOs work, their market size and history, and key characteristics of the asset class.
What is a collateralised loan obligation?
Collateralised loan obligations, or CLOs, are managed portfolios of loans of corporate borrowers. CLOs have increasingly become an important link between the financing needs of companies and investors seeking higher yields. CLOs are constructed by a CLO manager who selects loans to place in a portfolio, where such loans tend to be rated below investment grade (also referred to as leveraged loans).
Why Janus Henderson for CLOs?
Expertise and leadership: Our portfolio management team's nearly 60 years of combined experience, backed by a dedicated global team, stands as a testament to our success. This unparalleled expertise ensures we remain at the forefront of CLO investment management.
Market dominance: Janus Henderson has been at the forefront of active fixed income ETF innovation and has an extremely successful proposition where we are the third largest provider of actively managed fixed income ETFs globally[1] and the largest securitised active ETF manager globally[2]. We offer a number of pioneering securitised ETFs including an AAA CLO ETF in the US which is the largest CLO ETF in the world, recently surpassing $20 billion in AUM[3], and the recently launched Janus Henderson Tabula EUR AAA CLO UCITS ETF (JCL0) and Janus Henderson Tabula USD AAA CLO UCITS (JAAA) for investors in Europe. Building on our strong track record and success in the US, the firm is continuing to extend its CLO expertise globally to clients in Europe.
[1] Source: Morningstar as of 30 September 2024
[2] Source: Morningstar, as of 16 December 2024
[3] Source: Bloomberg Professional Service and Janus Henderson, as of February 3, 2025.
€43.06B
Firmwide securitised assets (as of 31/12/24)
- ABS │ 4%
- CLO │ 47%
- CMBS │ 8%
- Covered Bonds │ 1%
- MBS │ 27%
- RMBS │ 11%
- Other │ 2%
Source: Janus Henderson Investors as of 31st December 2024.
Note: Firmwide assets include securitised products available outside of Europe and securitised portions of other fixed income strategies.
Dedicated CLO Expertise
Head of Secured Credit | Portfolio Manager
Portfolio Manager
Portfolio Manager
Lead - Fixed Income Client Portfolio Management (EMEA) / Fixed Income ESG
Six key characteristics of CLOs
1
Strong credit ratings
CLOs stand out for their robust credit quality, with approximately 80% of securities rated between AAA and A.
2
Robust structural protection
The structural protections embedded within European CLO can offer valuable buffers against losses*.
For a AAA CLO, for example, the typical credit support is 40% – until cumulative collateral losses exceed 40%, the AAA notes do not take a capital loss. This would also imply losses of more than two and a half times the GFC peak level are needed in order to start to incur a potential loss on a AAA CLO.
*No guarantee. Source: Moody’s Investors Services, Janus Henderson Investors. Please note defaults and losses are for overall market, CLO transactions due to restrictive eligibility criteria typically experience lower default rates, 2023
3
Enhanced Quality
In a typical CLO structure, while the underlying loans are rated below IG, roughly 80% of the securities are rated AAA through A. The CLO manager can curate the loans to include and trade in and out of the portfolio during a reinvestment period, aiming to improve credit quality and risk-adjusted returns.
4
Attractive yields
Despite their higher credit ratings, CLOs have offered attractive yields relative to other fixed income asset classes. AAA-rated CLOs have tended to offer similar yields to investment grade corporates (around an A- average credit quality at an index level), whilst BBB CLO yields are nearer to high-yield corporates (around a BB- average credit quality at an index level).
One explanation for the higher yields is a complexity premium associated with the asset class.
Source: Bloomberg, ICE, JP Morgan. As at 31 December 2024. Investment grade corporates index=ICE BofA Euro Corporate Index. High-yield corporates index=ICE BofA Euro High Yield Index. Yields not guaranteed.
5
High diversification
A typical CLO may hold 100-200 loans, well diversified across borrowers, industries and sectors.
6
Compelling liquidity
European CLOs enjoy good liquidity, delivered through a well-established market with more than 19 market makers, buoyant daily trading flows and increasing participation from a broad range of investor types.
The liquidity of CLOs also stems from their diversified risk profile and structural protections. Unlike single-industry or single-borrower exposures, CLOs contain a broad mix of loans across various sectors, diluting the impact of sector-specific downturns. This diversification, combined with the significant credit enhancement for say the senior tranches, makes it easier for investors to price and trade these securities, even during market stress.
Risk considerations for CLOs
CLOs are complex, and while they usually have a high credit rating, they also have inherent risks.
- The underlying loans are issued to below-investment grade corporations whose revenues and cash flows may be affected by economic shifts, potentially impairing their ability to make loan payments.
- Borrowers have the ability to pay off their loans early, making CLOs subject to prepayment risk, which could lead to lower reinvestment interest rates for investors.
The value of an investment and the income from it may go down as well as up and you may lose the amount originally invested.