Also referred to as CLOs. A CLO is a form of securitisation, the underlying receivables of which are certain categories of loans and bonds.

Specifically, a CLO transaction involves an orphan company (known as a special purpose vehicle (SPV)) issuing newly created structured finance instruments (being debt securities in the form of bonds or notes and often referred to as "CLO securities") to investors. The CLO securities are:

Divided into several classes or tranches of varying size, credit rating and priority ranking (categorised as senior, mezzanine, junior or subordinated).

Funded by and secured over a portfolio of financial assets consisting of primarily senior secured loans alongside other types of loans (for example unsecured senior loans, mezzanine loans and second lien loans) and, in some cases, bonds (including senior secured bonds, unsecured senior bonds, mezzanine bonds and high yield bonds) acquired by the SPV.

The SPV uses the proceeds arising from the issue of its CLO securities to purchase the portfolio of financial assets.

See also collateralised debt obligations (CDOs).

For more on CLOs, see Practice note, Collateralised loan obligations (CLOs): overview.