I know what a CLO is but how does it differ from a BDC? ...in terms of collateral, leverage level, AAA tranche pricing (cheaper/more expensive than a CLO and why?), publicly traded or not...etc.etc etc. Also, they're both SPV's right?
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http://www.sutherland.com/files/upload/ABCsofBDCsWebinar.pdf
A BDC is a publicly traded company that invests in debt and equity securities and dividends most of its income (like a REIT but for corporate securities instead of real estate). A CLO is a securitization of a pool of loan assets.
There are some similarities: 1) Cash flow waterfall: BDCs dividend most (>=90%) of their cash flow to owners, CLOs pay 100% of interest down their waterfall with the residual going to equity 2) Levered investments
There are also some differences: 1) Active management/origination: BDCs are actively managed and, as a rule, actively seek to originate investments, usually to mid-market companies. CLOs generally are more what I'd call "semi-actively" managed. Depending on the structure, a CLO's portfolio can be static or can have the ability to trade within the restrictions of an indenture. 2) Source and amount of leverage: BDCs sell bonds and borrow money from various federally subsidized loan programs. They are restricted to 1:1 leverage versus up to 8:1 in CLOs at the peak of the market. 3) Assets: BDCs can invest in debt and equity. CLOs as a rule can only invest in debt; usually they are restricted to only leveraged loans with restrictions on rating, size, industry diversity, etc. There are MM CLOs that invest in smaller, club-ish deals to smaller/MM companies and there are what're called broadly syndicated CLOs that invest in large-cap syndicated loans (~200mm-3bn+) CLOs usually have restrictions on holding equity, even if they get it via a reorganization or bankruptcy.
Some BDCs (Kohlberg in particular) invest in and/or manage CLO securities-Kohlberg & Co. owns Katonah Debt Advisors, which manages CLOs.
Another difference: BDCs are regulated but at the end of the day they are corporations with management that is entrusted to act in the shareholder's best interest; a CLO is an SPV that has a manager but is governed by an indenture.
An interesting book about BDCs is "Fooling Some of the People All of the Time" by David Einhorn (of Greenlight Capital). It details his short case and legal/public opinion battle with Allied Capital, a BDC that was recently purchased (essentially out of bankruptcy) by Ares.
A big plot point in FSOTPAOTT revolves around the idea that BDCs have to mark their assets to market, which can be difficult given that a lot of their investments are private.
By contrast, (most) CLOs use a special form of portfolio accounting where (most) assets are counted at par, rather than cost or market. This is because they're supposed to be fairly static vehicles that are designed to ride out credit cycles (IMO they've worked out pretty well in this regard and anyone who held late-07 vintage CLO equity from origination went on a bumpy ride but is probably going to end up with an attractive IRR). The linked articles about Lynn Tilson's Zohar "distressed CLOs" shows how that got people into trouble during the peak:
http://blogs.forbes.com/investor/2011/04/06/lynn-tilton-diva-in-distres…
Besides "standard" CLOs there're also synthetic CLOs and market value CLOs (also called Total Return Swap or "TRS" funds). Market value CLOs are basically like a margin account for syndicated loans, and are subject to capital calls like other margin accounts if prices drop.
In my opinion, the spiral effect from TRS lines liquidating when the counter-parties made margin calls was part of why senior secured prices debt dropped so low in 2008, even though any reasonable recovery rate implied higher valuations, which in turn was part of why lots of distressed and fundamental credit funds made such a killing in 2009/2010 when that debt rebounded.
Dang, Kenny. You're really into BDC's. Good posts, bro.
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