Editor’s Letter

Abstract

Welcome to the Summer 2019 issue of The Journal of Structured Finance. This issue focuses entirely on collat‐ eralized loan obligations (CLOs) and has a guest editor, Jeffrey Stern, who co‐chairs the structured finance practice at Winston & Strawn, LLP. Mr. Stern is a leading expert on CLOs, and he has pulled together a great lineup of articles for this issue. CLOs are currently quite hot. This year’s issuance volume through mid‐October stands at $93.6 billion, which is slightly behind last year’s pace, but still brisk. For those who are new to CLOs, here is a quick intro: A CLO is like a mutual fund that invests in loans to highly leveraged companies (i.e., companies with speculative‐grade credit quality). However, unlike a mutual fund, most of the securities sold from a CLO are themselves bonds, rather than shares. In simplest terms, a CLO is an arrangement that raises money primarily by issuing its own bonds and then investing the proceeds in a portfolio of leveraged loans. Payments on the portfolio are the main source of funds for repaying the CLO’s own securities. An early ancestor of today’s CLOs was collateralized bond obligations (CBOs). Junk bonds composed the portfolios of many CBOs. CBOs experienced a rough period in the early 2000s, when many junk bonds defaulted (Exhibit 1). Participants in those deals appear to have overestimated the diversification in the underlying portfolios. Most CLOs have actively managed portfolios. A typical deal has a manager (i.e., a management company) that collects fees for managing the portfolio—again, like a mutual fund.