Setting up your first CLO?

APAC bilateral and syndicate lenders are increasingly looking to leverage their local origination experience to create innovative collateralized loan obligation (CLO) products.

While CLO structures have been popular in the sophisticated US debt markets for decades, APAC DCM markets have only recently started to support CLO origination.

What is an APAC CLO?

A CLO is simply a lending structure that simultaneously solves two ‘problems’. For the corporate borrower it delivers finance, for the financial institution it delivers a HY return.

More interestingly a CLO is a complex ‘equation’ that needs constant balancing between promised interest repayments to equity / debt holders and income generated by borrowers.

CLO Facility Agent

Compared with a simple bilateral loan facility agent role, a CLO facility agent faces additional challenges including:

i. Fluctuating cash payments that necessitate early risk identification and agile responses; and

ii. Numerous loan assets requiring tech platforms that aggregate data points into valuable insights.

Conflicts of interests

CLOs are also complicated by the fact that they involve a combination of debt and equity investors, each with different reporting requirements and potentially misaligned risk/return payoffs.

Conflicts are managed by substantive reporting and monitoring obligations, typically carried out by the facility agent and security trustee undertaking complex calculations and reporting activities.