Collateralized loan obligations (CLO) are driving lots of activity in private debt markets and Collin Kitchell, head of shared services at Broadridge Financial Solutions, says he couldn’t be happier about it.
Kitchell recently took part in video chat with FTF News that focused on the operational, IT, and workflow challenges of private debt. The securities industry has stayed focused on private debt in part because of CLOs.
A CLO “is a single security backed by a pool of debt. The process of pooling assets into a marketable security is called securitization,” according to the website Investopedia.
Over the last two years, CLOs have been “driving and fueling the private debt market,” Kitchell says. However, to say the least, CLOs are complex and challenging instruments.
“So, when you think about a CLO you’re talking roughly a six-to-10-year loan that goes through five concrete stages,” Kitchell says. “Simply put, the first stage, what we consider a warehousing stage, is the purchase of the initial collateral on that loan.”
The next big stage is “a ramp-up stage where the borrower and lender are going to be purchasing the remaining collateral to complete the portfolio underneath that loan. You’ll then move into a reinvestment stage, which has a handful of things that occur in terms of tranches, et cetera. But it’s really that reinvestment period of the loans to improve the portfolio’s credit quality,” Kitchell says.
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