CLOs: Corporate Loans Sliced, Diced and Worrisome

A decade ago, risky subprime mortgages were supposedly made safer when they were packaged and repackaged into bonds. Instead, those securities ended up blowing up the global financial system. Now investors are clamoring for risky corporate loans that are being similarly bundled into notes -- and global regulators are watching closely, hoping to make sure history doesn’t repeat.

Collateralized loan obligations, or CLOs. If that sounds familiar, you may be thinking of Collateralized Debt Obligations, or CDOs, which became famous after melting down in the runup to the 2008 financial crisis. Both are structured finance products created by pooling loans to create securities sold to investors. While CDOs cover a wide array of debt, CLOs are built from leveraged loans -- sub-investment grade loans to companies with high levels of debt, or leverage.