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Understanding CLOs

Published on
October 16, 2025
Read time
2 minute(s) read

With more than €2 billion in Collateralized Loan Obligations (CLOs1) across its range of funds as of 30 September 2025, out of a total of nearly €16.6 billion invested within credit, Carmignac has established itself as one of the leading players in this segment in Europe.

CLO: Key points

A bond backed by corporate loans

A CLO (Collateralized Loan Obligation) is a structured product composed of a diversified portfolio of syndicated bank loans, mainly senior and secured, granted to companies across various sectors.

A tranche-based structure offering various risk/return profiles

Investors can choose between senior tranches, mezzanine tranches, or equity tranches, each offering a specific risk/return profile.

A source of diversification and performance

With over 20 years of history, CLOs provide a complementary source of yield to traditional asset classes.

CLOs have been around for over 20 years and have weathered numerous credit cycles: the dot-com bubble in the early 2000s, the financial crisis in 2008, the eurozone debt crisis in 2011, the Covid-19 crisis and, more recently, the inflationary shock of 2022/2023.

Over the past two decades, European CLO tranches rated AAA, AA, or A have never experienced losses, and losses on lower-rated tranches have been minimal. This strong resilience stems from the nature of the collateral, the diversification of the underlying portfolios, and the structuring of CLOs.

Source: Carmignac, S&P Global rating, Q1 2024.

CLO: a bond backed by a pool of corporate bank loans

A CLO is a debt security backed by a diversified portfolio of bank loans. These loans are syndicated, meaning they are granted by a group of financial institutions. They are issued by a dedicated legal entity, the SPV (Special Purpose Vehicle), and belong to the family of securitised assets.

Unlike other securitised instruments, such as Residential Mortgage-Backed Securities (RMBS) linked to mortgage loans, CLOs are not tied to a single economic segment. They consist of loans granted to companies across a variety of sectors and geographies that tend to generate stable and recurring cash flows. For example, in European CLO portfolios, the most represented sectors are healthcare, business services, and chemicals.

These loans are primarily used to finance strategic acquisitions and leveraged buyouts (LBOs). Most are senior loans, meaning they have repayment priority and are “secured” by the borrowing company’s assets or equity. They are usually repaid early and at any time.

Because they are floating-rate instruments, CLOs are also less sensitive to interest rate fluctuations — higher rates mean higher coupon payments.

CLO structure

The assets consist of loans granted to companies, actively managed by a CLO manager whose interests are aligned with those of investors2.

The liabilities consist of separate tranches of debt:

  • Senior: This is the tranche with the highest rating from credit rating agencies and therefore presents a lower risk compared to other tranches. It is also the most common tranche in CLOs.
  • Mezzanine: This tranche carries a moderate risk, in return offering higher returns.
  • Equity: This is the riskiest tranche, but the one that offers the highest potential return.

The expected lifespan of a CLO at issuance ranges from six to ten years. During the first four to five years, prepayments on the loans are mostly reinvested before the CLO begins to repay its debt and the tranches start to amortise.

Coupon and principal payments on the liabilities are paid using interest and principal payments on the assets (loans).

A source of diversification and performance

For all these reasons, we believe that CLOs are a source of diversification and a new driver of performance beyond traditional equities, currencies and bonds. However, investing in these instruments requires strong technical, legal, and analytical expertise to assess their risk profile.

Carmignac has this expertise most notably since the arrival of Fund Manager, Florian Viros in 2015. Florian is a recognised player in this asset class with nearly 20 years of experience in CLO management, structuring, and investment. We can therefore leverage this expertise to diversify the investments in our portfolios under management.

Florian works within the Carmignac credit department which identifies, analyses, and carefully selects CLO opportunities — choosing carefully CLO managers, tranches, and vintages. This investment process combines quantitative and qualitative factors to evaluate the potential return under various scenarios and across all risk profiles.

1Reference to certain securities and financial instruments is for illustrative purposes to highlight stocks that are or have been included in the portfolios of funds in the Carmignac range. This is not intended to promote direct investment in those instruments, nor does it constitute investment advice. 2CLO managers are required to retain 5% of the risk of the underlying portfolio and, in many cases, hold the riskiest tranche themselves.

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