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Fitch Learning

CLO Credit Risk

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Next dates

May 15—16
2 days
London, UK
GBP 2095 ≈USD 2710
GBP 1047 per day
May 20—21
2 days
New York, USA
USD 2995
USD 1497 per day


The overall goal of this two-day workshop is to equip participants with the analytic skills and understanding to assess the risk and rewards inherent in Collateralized Loan Obligations (CLOs).

Key Learning Outcomes:

  • Use a structured approach to evaluate the underlying assets, asset manager and transaction structures
  • Understand the impact of key variables on risk assessment models
  • Critique the structure to identify and assess the risks and protections afforded
  • Appreciate the rationale for CLOs from the perspective of the issuer and the investor
  • Highlight differences between CLO 1.0 and 2.0.

Analytic Framework

The goals of this section are to highlight key elements of the CLO market and to establish a framework of analysis for CLOs.

Industry overview

  • CLOs in the context of the high yield market
  • Why CLOs? Motivations behind the deal

Analytic approach to credit evaluation

  • Applying the analytic framework to CLOs: purpose, payback, risks and structure
  • Exercise: examining differences in pre- and post-crisis CLOs.

Risks to Repayment

The goal of this section is to consider issues related to the CLO assets and asset managers which could affect repayment of CLOs.

Underlying assets

  • Defining the underlying assets
  • Identifying the key variables which impact likelihood of default and recovery
  • Assessing asset credit quality
  • Default probability: the use of credit ratings, calculating WARF (weighted average rating factor)
  • Recovery rate: examining asset security and adjustments to standard assumptions.
  • Impact of covenant-lite loans
  • Importance of diversification
  • Asset concentration and correlation
  • Cash flow analysis: understanding portfolio credit quality under various stress scenarios
  • Exercise: using the Portfolio Credit Model to understand sensitivity in portfolio credit risk.

Asset manager

  • Scope of manager's role
  • Methodology for assessing CLO asset managers
  • Key man risk
  • Management replacement provisions.


The goal of this section is to understand how the features of CLO transactions address repayment risk and provide returns to investors.

Credit enhancement

  • The role of credit enhancement: loss allocation
  • Sizing: how the level of credit enhancement is determined for the target ratings.

Note profile

  • Terms and conditions
  • Ramp up, reinvestment and amortization periods
  • Class X: the role of excess spread
  • Waterfall structures: protecting priority of payments
  • Unravelling payment flows: sources, applications and redistribution of funds
  • Expected and legal maturity; extension risk, optional redemption features
  • Exercise: Unravelling waterfall structures.

Structural safeguards

  • Target portfolio characteristics and managing to dynamic collateral quality tests
  • Coverage tests (OC and IC): rationale, definitions and implications
  • Events of default; liquidations
  • Understanding sales, trading and reinvestment criteria and controls
  • Counterparty risk
  • Exercise: Examining CLO coverage tests
  • Exercise: Evaluating Structural Features of CLOs.

Legal framework

  • Bankruptcy remoteness and non-consolidation
  • Validity of transfer/perfection of security
  • Regulatory issues: risk retention proposals, Foreign Account Tax Compliance Act.

Market Conditions

  • Relative value: comparing returns across asset classes
  • Current market topics: CLOs going static, asset manager consolidation
  • CLO market performance.

Monitoring Performance

The goal of this section is to highlight the on-going evaluation of CLO programs.

  • Timely and adequate reporting
  • Tracking portfolio changes and performance
  • Asset defaults, restructurings and recoveries
  • Surveillance and rating changes: expectations vs. performance through the cycle.

Who should attend

Investors, credit risk managers, issuers, regulators, bankers and other professionals who need to understand the key risks and features of CLOs.


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