CLO Credit Risk
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.
The goals of this section are to highlight key elements of the CLO market and to establish a framework of analysis for CLOs.
- 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.
- 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.
- 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.
- The role of credit enhancement: loss allocation
- Sizing: how the level of credit enhancement is determined for the target ratings.
- 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.
- 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.
- Bankruptcy remoteness and non-consolidation
- Validity of transfer/perfection of security
- Regulatory issues: risk retention proposals, Foreign Account Tax Compliance Act.
- Relative value: comparing returns across asset classes
- Current market topics: CLOs going static, asset manager consolidation
- CLO market 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.