Public Fixed Income

CLOs: Fact vs. Fiction

June 2023 – 5 min read

Despite generating attractive returns with low default rates for more than a quarter century, CLOs are still a commonly misunderstood asset class.

Collateralized loan obligations (CLOs) have existed since the 1990s, but misconceptions surrounding the asset class persist. We present the following to help better understand this intriguing market segment and to separate fact from fiction.


CLOs are the same as CDOs and caused the financial crisis.


Collateralized debt obligations (CDOs) is the broad term that describes a type of structured finance security that can be backed by a portfolio of various forms of debt including corporate loans and bonds. However, most people are aware of the CDOs that are backed by subprime residential mortgage-backed securities (RMBS). In the build-up to the Global Financial Crisis, subprime residential mortgages often had little or no documentation and were poorly underwritten. When housing prices crashed during 2007–2009, these highly correlated subprime mortgages experienced massive losses, which resulted in substantial defaults in RMBS CDO portfolios. Those defaults are what bled into the broader macro environment. But RMBS CDOs are not CLOs.

CLOs are a specific type of CDO that are primarily backed by highly diverse pools of senior secured loans. These loans have historically strong recovery rates averaging over 70% for the years spanning 1987–2022, and are typically made to large well-known corporate borrowers such as United Airlines, Virgin Media and Burger King, who provide extensive annual reporting.1 In an issuing company’s capital structure, these loans are usually senior to other outstanding debt, including high yield bonds. These loans are also secured by some or all of a borrower’s assets, which offers additional credit risk protection.

1. Source: Moody’s. As of March 13, 2023.

Want to read the full article?

View PDF

Bo Trant

Client Portfolio Manager, Structured Credit

Tim Wolak

Client Portfolio Manager, Structured Credit

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.

Related Viewpoints