How do debt funds use CLOs
This might be a really dumb question but any insight would be great. I’m familiar with how debt funds use warehouse lines to juice their returns but unsure of how debt funds use CLOs to help with returns. I might be thinking of this entirely wrong but do debt funds originate off balance sheet with their own money and then collateralize in order to create levered returns. Any insight would be greatly appreciated.
They use the CLO's to take the loans off balance sheet. and recycle capital. Probably make some okay fees selling the loans.
Debt funds contribute loans into pools as a way of obtaining leverage on the loans.
A simple numbers example:
S+400 loan = 9.5% rate
AAA-BBB weighted average is S+200 and up to 75% of the total loan dollars. So they are borrowing at 7.5% for 75% of the total loan. Debt Fund's return on their 25% investment is 15.5%.
Ok that’s kind of how I was thinking about it. Is there any advantages or trade offs to kicking loans into clos vs levering your loans through warehouse lines?
Cost of funds is the key advantage
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