BSL CLO Primer Barclays

CORE
Research
Geoff Horton, CFA

+44 (0) 20 3134 2680
geoffrey.horton@barclays.com
Barclays, UK
Broadly Syndicated Loan (BSL)

CLO Primer
January 2021
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports
prepared for retail investors under U.S. FINRA Rule 2242. Barclays trades the securities covered in this report for its own account and on a discretionary basis on
behalf of certain clients. Such trading interests may be contrary to the recommendations offered in this report.
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 96.
Restricted - External
Table of Contents
• Overview
• Structure
• Portfolio Tests
• Underlying Collateral
• CLO Managers
• Tranche Profiles
• Regulation
• Historical Performance
2 22 January 2021
Overview
• Collateralized loan obligations (CLOs) are actively managed securitizations
backed primarily by a pool of 150-300 BB and single-B rated issuers’ senior
secured broadly syndicated loans and bonds.
• CLOs are primarily floating-rate products and are typically issued to take
advantage of the funding gap between asset yields (e.g. loan spreads) and
liability costs (e.g. CLO tranche spreads), or the “arbitrage”.
• The CLO vehicle itself is capitalized via the sale of debt tranches (typically rated
AAA through BB or single-B) and equity.
• CLO equity holders receive the residual after asset income is used to pay
tranches liabilities and deal fees.
• CLO managers, which include credit funds, asset managers and insurance firms,
receive fees for managing the portfolio. The pool of assets can usually be traded
for 4-5 years before the CLO begins to wind down and the tranches amortize.
• CLOs own more than half the global loan market, and while a majority of the
assets in the portfolio are not subject to mark-to-market factors, collateral quality
tests ensure the portfolio does not become too concentrated or risky.
3 22 January 2021
Overview
• Despite the negative headlines, CLOs have performed well over time, with no AAA or AA
tranches ever taking a loss. Per Moody’s, the 10-year cumulative impairment rate of CLO
tranches originally-rated AAA is 0.0% versus global CDOs (ex-CLOs) at 38.9%.
• Even after remaining resilient through the Global Financial Crisis (GFC), CLOs issued after
2009 tend to have less structural leverage, shorter reinvestment periods, more restrictions
on asset holdings, and greater focus on matching asset cash flows to liabilities.
• More importantly, CLOs today do not contain any market value triggers that would cause
forced selling. Thus, CLO managers are incentivized to hold assets over the long term,
rather than being forced to sell at the lows.
Historical CLO Tranche Impairment Rates Have Remained Low

Global CDO Global
Orig. Rating US CLO Euro CLO Global CLO
(ex-CLO) Corporates*
AAA 0.0% 0.0% 0.0% 38.9% 0.1%
AA 0.0%
CCC 0.0% 0.0% 47.9% 0.8%
bucket
A 0.1% 0.0% 0.1% 52.8% 2.2%
BBB 2.9% 0.0% 2.3% 62.2% 3.3%
BB 5.8% 4.6% 5.4% 60.9% 15.1%
Note: Global corporate default rate data is the 10-year cumulative issuer-weighted global default rate from 1983-2019. CLO impairments by original rating, 10-year cumulative impairments over 1993-
2019. Source for all charts: Moody’s, Barclays Research
4 22 January 2021
Table of Contents
• Overview
• Structure
• Portfolio Tests
• CLO Managers
• Regulation
5 22 January 2021
Structure Overview
• CLOs are vehicles that invest in a diversified pool of mostly leveraged loans.
• The CLO itself is a bankruptcy-remote SPV, capitalized via the sale of debt tranches and equity.
• The CLO manager receives fees for managing the pool of assets.
• Income generated by the pool of assets is used to pay the tranche liabilities.
• For “risk retention compliance” (only US middle market and European CLOs), CLO managers
retain 5% of the deal through a vertical slice (smaller debt and equity pieces), horizontal slice
(larger equity piece) or “L-shaped” slice (mixture of the two).
CLO Manager
Management
Management Fees
Agreement
P&I Cash P&I Cash Senior Notes

Flows Flows [AAA]
Asset
Portfolio SPV
Issuance Issuance Other Notes
Proceeds Proceeds [AA-B]
Equity
Source for all charts: Barclays Research
6 22 January 2021
Primary Types of CLOs
• CLOs are issued for two primary purposes: an arbitrage or balance sheet vehicle.
• Most CLOs are arbitrage vehicles, meaning they are issued to capture the difference in asset
income and liability costs and use structural leverage to enhance returns.
• Balance sheet CLOs are used as an additional, cheaper source of funding for specialty finance
companies or banks, where the underlying loans are typically self-originated and smaller in size.
• Arbitrage CLOs are issued by credit funds, money managers and insurance firms where the
underlying assets are purchased in the primary and secondary broadly syndicated markets.
• Arbitrage vehicles will typically have an initial reinvestment period of 4-5 years, whereas balance
sheet CLOs tend to be shorter or even static (e.g. no initial reinvestment period).
• Issued by credit funds, money managers, etc.
• Used to capture spread between assets and
Arbitrage liabilities
(~95% of deals) • Assets purchased in primary/secondary

• Usually larger facility loans
• Typically 4-5 year initial reinvestment periods
• Issued by banks, specialty finance companies
Balance Sheet • Used as cheaper source of funding
(~5% of deals) • Self-originated assets

• Typically smaller facility loans
• Shorter to no reinvestment period
7 22 January 2021
CLO Issuance and Outstanding
US BSL CLO New Issue Supply European CLO New Issue Supply
140 New Issue US BSL CLO Supply ($bn) 40 New Issue European CLO Supply (€bn)
120 35
118 35
100 113 30 32
104 104 30
80 92 25 27
86 81
60 73 78 20 22
64 15 20
40 50 17
46 14 14
10
20 28 11
16 14 15 14 5 10
1 1 12 8 7
0 5 3 4 6 0 1 1 0
0 1
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
US BSL CLOs Outstanding European CLOs Outstanding

700 US BSL CLOs Outstanding ($bn) $654.6 160 European CLOs Outstanding (€bn)
€140.4
600 140
120
500
100
400
80
300
60
200 40
100 20
0 0
Jan-00 Jan-04 Jan-08 Jan-12 Jan-16 Jan-20 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18 Jan-21
Pre-GFC Post-GFC Pre-GFC Post-GFC
Source for all charts: S&P LCD, Intex, Bloomberg, Refinitv, Kanerai, Barclays Research
8 22 January 2021
Sample CLO Structure At New Issue
Size Rating Credit Discount Cash
Class Coupon WAL
($mn) (S&P/Fitch) Enhancement Margin (DM) Price
X 1.0 AAA/NR L + 60bp - 1.8 60bp 100
Order of Payments
Order of Losses
A 256.0 AAA/AAA L + 132bp 36.0% 6.2 132bp 100
B 48.0 AA/NR L + 185bp 24.0% 8.2 185bp 100
C 24.0 A/NR L + 285bp 18.0% 8.9 285bp 100
D 22.0 BBB-/NR L + 395bp 12.5% 9.5 395bp 100
E 18.0 BB-/NR L + 734bp 8.0% 10.0 825bp 94
Equity 33.1 NR/NR Residual N/A - - -
$402.1 L + 194bp
• Total deal size is typically around $500mn in US and €400mn in Europe, where the
Deal Size senior-rated tranche is ~60-65% of total
• Equity tranches are typically 9-10% of total notional (~9-10x levered)
• AAA tranches are typically rated by 2-3 agencies and 1-2 for lower-rated tranches
Ratings
• Higher-rated tranches can have the portfolio take more in losses before any
principal loss is taken (e.g. higher credit enhancement/subordination)
• CLO liabilities are typically floating-rate, referencing 3-month Libor/Euribor (floored

Liabilities at zero) and pay on a quarterly basis
• Fixed-rate tranches can be used to decrease duration risk from holding fixed-rate
assets, and help fulfil demand from fixed-rate insurance buyers
Note: Representative US BSL CLO structure. DM calculations are used to easily compare prices across tranches as it accounts for differences in maturity and coupon. Similar to other bonds,
tranches issued at par will have a DM (yield) equal to the coupon, whereas a tranche issued below par will have a higher DM (yield). Source for all charts: Intex, Bloomberg, Barclays Research
9 22 January 2021
Structural Enhancements
• For CLO tranches to receive a higher rating than the underlying assets (typically rated BB and
single-B), CLOs have several investor protections including cash-diverting tests, portfolio
diversification requirements, excess spread and credit enhancement.
• The Credit Enhancement (C/E) of a tranche is essentially how much the portfolio’s par value
(not market value) can decline before said CLO tranche begins taking a principal loss.
• Assuming average recovery rates decline to 60%, constant annual default rates would have to
reach nearly 7% before a new issue US BSL BB tranche is impaired (~9% for European BB).
• Even though historical cumulative credit losses have exceeded lower mezz C/E levels, manager
trading (minimizing par losses) and cash diversion tests have kept default rates low.
C/E vs. Historical Credit Losses Default Rate for US BSL BB Impairment
Credit Enhancement vs Credit Losses (%) Breakeven Constant Annual Default Rate (%)
12% 12%
10.2%
10% 10%
US BSL BB C/E 8.3%
8% US BSL B C/E 8% 6.9%
5.8%
6% 6% 5.1%
4% 4%
Average Loan Market Default Rate: 2.9%
2% 2%
0% 0%
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 70% 65% 60% 55% 50%
Annual Default % Trail 7yr Cumul. Loss (Recov. @ 60%) Recovery Rate
Assumptions: 20% constant prepayment rate, default recovery lag of 12 month, no reinvestment after reinvestment ends, assets reinvested at 99.5 price and L+325bp spread. Modeled to maturity
Credit enhancement based on sample of Q4 2020 vintage US BSL CLOs. Long-term annual default rate based on average of S&P/LSTA default rate from 1999-2020. Results only for illustrative
purposes. Source for all charts: Intex, S&P LCD, Barclays Research
10 22 January 2021
Global CLO Structural Comparison
New Issue Tranche Thickness New Issue CLO Comp. Highlights

Original Tranche Thickness (%) US BSL European
100%
AAA C/E 38.0% 38.5%
AAA Coupon 3mL+132bp 3mE+108bp
90%
CLO Leverage 9.2x 10.5x
Wtd. Avg. Cost of Liabilities 183bp 194bp
80% Reinvestment Period ~3-5 yr ~3-4yr
Non-Call Period ~1-2 yr ~1-1.5 yr
70% 62.1% 60.1% Deal Size (mm) $407bn €340bn
Issuer Exposure Count 228 117
60%
Top 5 Issuers 5.5% 9.2%
Top 5 Industries (S&P) 36.4% 40.9%
Active Managers in 2020 84 43
50%
New Issue Credit Enhancement
40%
Original Credit Enhancement (%)
9.5%
12.8% 40% 38% 39%
30%
6.7% 35%
29%
5.9% 30%
20% 6.5% 24%
25% 22%
5.9%
20% 18%
3.4% 5.5% 16%
10% 1.5% 2.4% 15% 12%
9%10% 8% 7%
9.7% 8.6% 10%
0% 5%
US BSL European 0%
Equity B BB BBB A AA AAA AAA AA A BBB BB B
US BSL European
Note: All data is median of Q4 2020 vintage deals, thus tranche thickness does not add to 100%. Source for all charts: S&P LCD, Intex, Barclays Research
11 22 January 2021
CLO Pre- versus Post-GFC
• After the GFC, CLOs became more conservative with enhancement levels and asset limitations.
• Based on credit enhancement, what was once rated AA, would be rated around single-A today.
• Compared to pre-GFC CLOs (1.0), post-GFC deals (2.0) tend to have:
• less structural leverage (more credit enhancement)
• shorter reinvestment periods (less chance for par erosion)
• greater ability to manage CLO liabilities (deals can refi, reset or re-issue)
• shorter non-call periods (more investor flexibility)
• more restrictions on asset holdings (no structured finance assets)
• more focus on minimizing asset and liability maturity mismatch (cannot buy assets
maturing after CLO maturity)
Credit Enhancement Increased Post-GFC

Original
1.0 US BSL 2.0 US BSL 1.0 European 2.0 European
Rating
AAA 28% 36% 30% 38%
AA 21% 25% 23% 29%
A 15% 20% 17% 22%
BBB 11% 14% 11% 16%
BB 8% 9% 7% 10%
Source for all charts: S&P LCD, Intex, Barclays Research
12 22 January 2021
Waterfall Basics
• CLOs distribute interest and principal cash flows in accordance with a set of “waterfalls” on each
payment date (typically quarterly).
• Coverage tests are performed at different stages of the waterfall to divert cash flows if deal
performance has declined.
Interest Waterfall Principal Waterfall
Sequentially, to:
Payment of senior expenses, accrued interest
1. Senior fees and exp.
2. Senior mgmt. fees
3. Note interest
OC/IC tests fail 4. Junior expenses

Reinvestment Post-reinvestment
Period Period
Senior Notes*
Reinv. Div. test
Pass OC/IC tests
Fail
Principal payments
Fail Pass
50% 1. Sub mgmt. fee
Additional collateral* 2. Residual to Equity
50% Reinvest in
Senior
new Residual to Equity
1. Sub. mgmt. Fee Notes*
collateral
2. Residual to Equity
*Extent necessary to satisfy tests Source for all charts: Deal documents, Barclays Research
13 22 January 2021
CLO Life Cycle
Portfolio Par ($mn)
$450
Effective Date
$400
$350
Closing Date
$300
$250
$200 Pricing Date
$150
$100
Callable
$50
$0
Yr 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr 11 Yr 12
Warehouse Ramp-up Reinvestment Post Reinvestment
• Warehouse (~3-9mo): An arranger/underwriter (i.e. an investment bank) typically provides financing to the collateral
manager to start purchasing assets several months before the Pricing Date of the CLO debt and equity.
• Ramp-up (~3-6mo): Period following the Closing Date (when deal documents are legally binding, warehouse is closed
and assets transferred into the SPV) during which the remainder of the portfolio’s assets are purchased by the manager.
• Reinvestment (~4-5yr): Commences on the Effective Date or when Target Par is reached. Manager is allowed to
reinvest asset repayments or sales proceeds into new collateral, subject to coverage tests and portfolio limits.
• Non-Call (~2yr): After the Non-call Period, the majority of the equity holders can direct the issuer to redeem the notes at
any time (referred to as optional redemption), either to fully call the deal, or perform a refi or reset.
• Post-Reinvestment: After the Reinvestment Period ends, collateral proceeds (with some exceptions) must be used to
redeem the CLO tranches sequentially, starting with the most senior tranche. CLOs are typically called 2-3 years after
the Reinvestment Period ends due to the exponential increase in the CLO’s debt cost (AAA tranche is largest tranche
with the lowest funding), decreasing equity distributions. A clean-up call option also becomes available once the portfolio
falls below ~15% of original balance.
Source for all charts: Deal documents, Barclays Research
14 22 January 2021
CLO Warehousing Period
• Warehouse financing, either in the form of a total return swap, or more commonly through an SPV, is often the first
aspect in a CLO’s lifecycle, completed well in advance of the debt and equity tranches being marketed to investors.
• Warehousing provides an opportunity for the CLO manager to patiently purchase assets in the primary market where
the assets are more likely to offer initial discounts (i.e. OIDs) compared with purchases in the secondary market.
• CLOs that price without using a warehouse (“print and sprint”) run the risk of primary loan supply being light during the
ramp-up phase, making asset accumulation difficult, but can be an attractive option after a sharp sell-off in loan prices
• Key features of warehouse financing:
• Maximum reinvestment period of typically 6-12 months, after which (if still in use) an amortisation period
begins. In practice, most CLOs price within six months of launching the warehouse.
• Senior lenders provide funding commitment for a significant majority (c.70-80%) of the pre-pricing warehouse
amount, and (in most cases) all of the remainder when the warehouse expands between pricing and closing. The
CLOs arranging bank is often a participant in the senior lender group.
• Subordinated lenders are subject to first losses on the collateral up to the entire amount of their investment.
The collateral manager is usually required to contribute at least 5% of deal balance, as warehouses are generally
considered to be securitisations, and thus subject to risk retention in European and US Middle Market CLOs.
• Portfolio profile tests are similar to priced CLOs, including limits on unsecured collateral, obligor concentration,
fixed rate securities, and CCC rated assets, among others.
• Senior mark-to-market ratio test (MV of the portfolio divided by the amount of senior funding outstanding),
where a drop below a minimum threshold triggers a Drawstop Event, preventing the manager from drawing down
additional funding, halts reinvestment and causes the amortisation period to start.
• However, only in a minority of warehouses are there actual market-value triggers that would cause the
warehouse to default and technically be forced to liquidate.
• Similar to senior noteholders in priced CLOs, senior lenders are well insulated from losses, and
negotiations to sell the pool via an auction or even hold the pool of loans on the arranger’s balance sheet
can keep the assets from being liquidated.
15 22 January 2021
Ramp-up and Reinvestment Period
• To close a warehouse, the facility can either pay-down through structured amortization, be
liquidated, or be taken out by pricing the portfolio into a CLO.
• Once the CLO is priced, the deal then shifts into the Ramp-up Period since portfolios are often
not fully ramped at pricing (contains typically half or less of the final planned assets).
• This is where the CLO manager purchases additional assets in the primary and secondary loan
market to fill up the remainder of the CLO’s portfolio.
• When the value of the portfolio reaches the pre-defined Target Par Amount, the deal becomes
Effective and the Reinvestment Period begins.
• Portfolio tests become active at this point, where the deal must be in compliance with the
collateral quality and coverage tests and concentration limitations to continue trading, or if failing,
the test must be maintained or improved for future trades.
• During the Reinvestment Period (c.4-5 years), the manager actively reinvests funds.
• Typically, the manager is allowed to trade in and out of positions on a discretionary basis, up to a
limit of 20-30% each year, with more flexibility to reinvest proceeds from “Credit Improved” (e.g.
improved financials, price or rating since purchase) and “Credit Risk” asset sales.
• Larger portfolio reallocations can also be done via a “Trading Plan”, where a number of trades
are grouped together, but they still have to abide by portfolio tests.
• The Reinvestment Period can end early, though, should the manager decide further reinvestment
would not be beneficial or if certain CLO tranche ratings are downgraded (“Restricted Trading
Condition”).
16 22 January 2021
Non-Call Period
• After the Non-call Period, equity holders can vote to:
• Call - Where the assets are sold, CLO liabilities are paid down and equity holders get the rest.
 Why? Equity holder thinks PV of future cash flows < value that can be realized today
• Refinance - Where tranches (all or individual tranches) can have their coupons reduced and WAL
test potentially extended.
 Why? Reduction in CLO liability costs increases equity distributions
• Reset - Where the reinvestment period is extended, documents can be amended, assets can be
swapped, equity can be injected and coupons are reset close to new issue levels.
 Why? Allows reinvestment to continue without the time and cost associated with calling a deal and
rolling the assets into a new CLO structure
US BSL CLO Refi/Reset Supply European CLO Refi/Reset Supply

Refi/Reset Supply ($bn) New Issue AAA DM Refi/Reset Supply (€bn) New Issue AAA DM
60 195 10 220
50 180 190
8
165
40 150 160
6
30 135 130
120 4
20 100
105
10 2 70
90
0 75 0 40
Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 2020 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 2020
Refi Reset New Issue AAA DM (RHS) Refi Reset New Issue AAA DM (RHS)
Source for all charts: Kanerai, Intex, S&P LCD, Barclays Research
17 22 January 2021
Post Reinvestment Period
• Despite the name, most CLOs still allow the manager to reinvest specific collateral proceeds
(unscheduled principal payments, Credit Risk sales) in the Post Reinvestment Period.
• This is subject to meeting certain performance and asset criteria, though, that are described in the
deal’s documentation (e.g. new asset must have same or better rating, maturity must be same or
shorter, etc.).
• Differences in deal language, structure, manager strategy and portfolio construction lead to different
levels of post reinvestment activity. Thus, deal amortization speeds tend to vary, though the WAL test,
which generally declines over time, tends to be the largest constraint to reinvestment in most deals.
• Proceeds must still be used to pay down the liabilities before the final maturity date, though, otherwise
an Event of Default would occur.
US BSL CLO AAA Factors European CLO AAA Factors

AAA Factor (%) 100% AAA Factor (%)
100%
80% 80%
60% 60%
Still in Still in
40% Reinv. 40%
Reinv.
Months
Past 20% 20%
Out of Months Past Out of
Reinv.
Reinv. Reinv. Reinv.
0% 0%
-36 -24 -12 0 -36 -24 -12 0
Active Deals Static Deals Active Deals Static Deals
Source for all charts: Kanerai, Intex, Barclays Research
18 22 January 2021
Events of Default
• CLO documents have event of default (EOD) stipulations that protect noteholders from
severe portfolio underperformance and breach of manager duties.
• Events of Default are difficult to achieve, with typical requirements being:
• missed interest on AAA/AA-rated tranches
• non-payment of principal at maturity
• the senior OC tranche ratio falls below ~102.5%
• issuer insolvency
• manager breach of duty
• For the senior OC ratio to fall to such a low level, the par value of the portfolio would have
to decline over 30%, based on typical starting overcollateralization tranche levels.
• In the rare event an EOD occurs, the reinvestment period terminates and the Controlling
Class (most senior tranche outstanding) can declare the notes immediately due and
payable.
• If all the CLO debt can be paid back in full, the trustee can direct the collateral to be
liquidated and pay down the tranches.
• Senior note holders could also waive an EOD, avoiding a forced liquidation event.
19 22 January 2021
Other Structural Variations – Combo Notes
• Combination notes, or combo notes, are created by combining CLO debt and equity into a
single structure, either inside or outside the original SPV.
• Combo notes allow investors to get exposure to a higher-yielding IG-rated asset by combining a
mix of higher-rated CLO tranches with CLO equity.
• The notes can be structured to meet an investor’s specific coupon and ratings target.
• Combo notes typically have a principal-only rating with a zero to low coupon, with underlying note
interest and equity distributions used for the combo note’s principal amortization.
• The combination of tranches introduces refinancing risk (when the underlying CLO tranches are
repaid and refinanced) and ramp risk (not acquiring the planned portfolio profile or having to
amortize earlier than expected).
• Refi risk can be mitigated by having the combo note hold a controlling vote of the equity tranche,
and specific document stipulations to prevent a refinancing unless certain conditions are met.
• US insurers have traditionally been the primary buyers of combo notes, which receive a NAIC 2
designation (lower risk capital required), despite packaging equity exposure that would otherwise
be mapped to a NAIC 6.
• However, starting in 2021, the NAIC will require insurers to apply for an NAIC designation for
combo note holdings, instead of being able to use a designation that relies on an assigned rating
agency rating (existing holdings will not be grandfathered-in).
• As a result, this may change the attractive relative value perspective of CLO combo notes for US
insurers.
20 22 January 2021
Combo Note Example
Combo notes are created by combining CLO debt and equity into a single structure,
allowing investors to get exposure to a higher yielding, investment-grade rated asset
Note: Percentages not shown to scale. Source for all charts: KBRA, Barclays Research
21 22 January 2021
Other Structural Variations – Class X Notes
• A newly issued CLO will occasionally include an X tranche.

• In 2020, roughly 16% and 33% of new issue US BSL and European CLOs included an
X tranche, respectively.
• An X tranche is typically less than 1% of the total deal balance ($2-3mn average), sits
at the top of the rating stack, is rated AAA (though the coupon is lower than the typical,
larger AAA tranche), has a WAL of less than 2 years and is not included in the
coverage tests.
• It is issued as a way to fund the initial interest reserve and closing date expenses.
• The deal can essentially fund these costs via more equity or by issuing an X tranche,
which initially lowers equity distributions.
• Principal on the X tranche is generally paid on a fixed amortization schedule, starting
around the first or second payment date of the deal.
22 22 January 2021
Other Structural Variations – MASCOTs
• A Modifiable and Splittable or Combinable Tranche (MASCOT) can be split into an
interest-only (IO) note and principal and interest (P&I) note.
• Similar to mechanics in the mortgage market, MASCOTs provide optionality to CLO
investors based on their view of future spread movements.
• As spreads widen, the likelihood that the CLO tranches will be refinanced decreases,
increasing the value of the IO notes. Owning the IO piece is essentially being short
material CLO spread tightening.
• However, the P&I note should appreciate given spread tightening.
MASCOT Example
• An example of a $50mn
AA-rated tranche that pays
L+185bp
• Different combinations of
IO and P&I notes can be
constructed, as outlined in
deal documents
Source for all charts: Deal documents, S&P, Barclays Research
23 22 January 2021
Other Structural Variations – AMRs
• An Applicable Margin Reset (AMR) is a method to reduce the inefficiencies and costs
of a traditional CLO tranche refinancing.
• Post non-call period, the AMR allows for a reset of the coupon of the AMR-applicable
tranches through a Dutch auction (e.g. coupon reduced until buyer found).
• The lowest coupon for which bids fully account for the principal balance of the tranche
will become the new coupon for the AMR-applicable tranche, subject to a “cap margin”.
• The failure of one tranche auction does not affect the success or failure of another.
• The auction initiation process is deal-dependent (automatically or through majority of
equity holder and/or manger) and occurs through an AMR auction service provider.
• An AMR does not require the cost (paid by equity holders) and time associated with
traditional refinancing process.
• Different from a typical “repricing”, if an AMR auction is successful, the coupon of the
AMR-applicable tranches automatically resets and no consent is required from holders
of those tranches.
• The first successful AMR auction took place in January 2020 for TCW 2019-1 CLO.
LCD reports coupons for the AAA through BB tranches were lowered, with the AAA
coupon being lowered from 144bp to 107bp, below the “margin cap” of 115bp.
• KopenTech notes there are $5bn+ of deals with the AMR functionality currently.
24 22 January 2021
Other Structural Variations – Hybrids
• There has been an increase in deals allowing for more flexibility in asset holdings (e.g. Hybrids).
• High CCC deals typically allow managers to hold up to 50% of CCC assets before being penalized,
above the 7.5% soft limit for BSL deals, creating a more distress-focused vehicle.
• CBOs (or Collateralized Bond Obligations) have large bond buckets (versus 5% limits in recent BSL
deals) and higher CCC buckets (15-17.5%). However, utilization of bonds greatly differs by manager.
• C/E is higher (e.g. lower equity leverage) for hybrids and they tend to price wider versus BSL deals due
to the increased risk of losses in the underlying collateral, thus making the initial equity arb challenging.
• As a result, less than $3bn of high CCC deals have been issued since the GFC, whereas more than
$14bn of CBOs have priced. The bifurcation is likely due to the more opportunistic trading nature of
CBOs, with much more flexibility to trade and build par than typical BSL deals.
Hybrid CLOs Have Higher C/E CBO Strategies Differ Widely

New Issue AAA C/E Bond %
60% 100%
53% 90%
49%
50% 80%
70% R² = 0.14
40% 38%
60%
30% 50%
40%
20% 30% Use of bond buckets can
differ greatly by deal
10% 20%
10%
Annualized 12mo. Sale %
0% 0%
BSL High CCC CBO 0% 50% 100% 150% 200% 250% 300%
For more detail, see “Trying to Bond in a Loan-ly World”, 14 February 2020. Source for all charts: Kanerai, Intex, S&P LCD, Barclays Research
25 22 January 2021
Table of Contents
• Overview
• Structure
• Portfolio Tests
• CLO Managers
• Regulation
26 22 January 2021
Portfolio Tests
• There are a series of tests and criteria to ensure assets purchased and held in the portfolio are
in compliance with the CLO documents:
• Eligibility Criteria – Characteristics each new asset must have to enter the CLO.
• Portfolio Profile Tests (PPT) – Portfolio-level minimum and maximum concentration
limits generally are meant to guarantee the minimum diversity and quality of the portfolio.
If a PPT is failing, the manager must maintain or improve the test to continue trading.
• Collateral Quality Tests (CQT) – Set of minimum and maximum tests to ensure portfolio
is balanced with respect to spread, rating, recovery rating, diversity and recovery ratings.
If a CQT is failing, the manager must maintain or improve the test to continue trading.
Eligibility Criteria Portfolio Profile Tests The portfolio manager

Collateral Qualityshall maintain
Tests
the following rating agency-driven
tests:
Not be a defaulted, deferring or equity At least 90% of senior secured assets Minimum WAS
security Minimum WAS Moody’s WARR
Minimum
Not be a synthetic or structured finance At least 70% of senior secured loans Minimum Moody’s WARR
Minimum
Minimum S&P WARR
S&P WARR
security
Not more than 4% of Mezzanine loans Minimum
MinimumMoody’s Diversity
Moody’s Score
Diversity Score
Be rated at least CCC- or equivalent by Minimum Moody’s WARF
each of the rating agencies Minimum
Maximum Moody’s WARF
S&P Breakeven Test
Not more than 20% of non-euro assets
Maximum WAL
Maximum S&P Breakeven
Have a legal maturity prior to the legal
maturity of the CLO notes Not more than 10% of fixed rate assets Maximum WAL
Source for all charts: Deal documents, Barclays Research
27 22 January 2021
Eligibility Criteria
• The CLO’s assets must meet certain European CLO Eligibility Criteria Example
Eligibility Criteria at the time it is added to
the collateral portfolio. Criteria
• Eligibility criteria usually refer to general Senior Secured Loan, a Senior Secured Bond, an Unsecured Senior
Loan, an Unsecured Senior Bond, a Mezzanine Obligation, a Second
features of the respective asset. Lien Loan, a Corporate Rescue Loan, or a High Yield Bond
Denominated in Euro; or denominated in a Qualifying Currency other
• For example, they define whether the CLO than Euro and no later than the settlement date of the acquisition
is allowed to only invest in loans, or Not a Defaulted Obligation or a Credit Impaired Obligation
whether the CLO manager is also free to It has a Moody’s Rating of "Caa3“ or higher or a Fitch Rating of
"CCC-“ or higher
buy bonds. Not a Structured Finance Security, letter of credit or a Synthetic
Security
• If it is discovered that the eligibility criteria
Not a Zero Coupon Security
were not met at the time of purchase (and Not a debt obligation that pays scheduled interest less frequently
the collateral manager acquired the asset than annually
despite ineligibility), the collateral manager Not a Project Finance Loan
Not a Deferring Security
must sell the asset immediately.
Not a Step-Down Coupon Security
• The criteria will also typically note whether Not an obligation for which the total potential indebtedness of the
the CLO must comply with negative Obligor(s) thereof under all underlying instruments governing such
Obligors' indebtedness has an aggregate principal amount of less
screening ESG language as described than EUR 200,000,000
later in the deal document. Shall have been acquired by the Issuer for a purchase price of not
less than 60% of the par value thereof, unless such obligation is a
Swapped Non-Discount Obligation
Not an Equity Security, including any obligation convertible into an
Equity Security
Not an ESG Excluded Obligation
Note: Representative 2020 vintage European CLO. Source for all charts: Deal documents, Barclays Research
28 22 January 2021
Portfolio Profile Tests
• The Portfolio Profile Tests (PPTs) or US BSL CLO Portfolio Tests Example
Concentration Limits define the minimum
and/or maximum asset exposures Test Limit
permitted, acting as parameters governing Senior Secured Loans, Cash and Eligible
Min. 90%
the CLO manager’s investment style. Investments
Max. 10%
• For example, this example deal requires at Second Lien, Unsecured Loans and Bonds
[Max 5% of Bonds]
least 90% of collateral in the CLO to be Single Obligor
Max. 1.5%
[Top 3 - 2.0%]
invested in 1st lien senior secured loans.
CCC/Caa Collateral Obligations Max. 7.5%
• This deal can also purchase HY bonds, Interest Paid Less Frequently than
Max. 5%
with a maximum limit of 5%. Quarterly
DIP Loans Max. 7.5%
• If a test is failing, the CLO manager must Delayed Drawdown/Revolvers Max. 10%
generally maintain or improve the test to Moody’s Rating derived from S&P Rating Max. 10%
continue trading. Single Industry
Max. 10%
[Top 2 -12%]
Cov-Lite Loans Max. 60%
Fixed Rate Obligations Max. 5%
Step-Up Obligations Max. 5%
Long-Dated Obligation Max. 2%
Bridge Loans Max. 0%
Discount Obligations Max. 20%
Obligor with Total Indebtedness <$400mn
Max. 5%
but >=$350mn
Note: Representative 2020 vintage US BSL CLO. Source for all charts: Deal documents, Barclays Research
29 22 January 2021
Collateral Quality Tests
• Collateral Quality Tests (CQTs) provide a set of control measures for managers to actively trade their
portfolios against, and prevent CLO portfolios from becoming too concentrated or risky.
• Min. Diversity Score (DS) test: Measures collateral concentration and correlation of underlying issuers
and industries. Attempts to ensure portfolio is relatively diversified across holdings.
• Higher diversity score = more diverse collateral
• Max. Weighted Average Rating Factor (WARF) test: Weighted average of the underlying assets’ default
probability ratings, which are typically based on Corporate Family Ratings and converted into Rating
Factors. Assets with ratings on Negative or Positive Watch can also be notched down/up one rating when
calculating WARF. Attempts to restrict portfolio from becoming too concentrated in lower-rated assets.
• Higher portfolio WARF = lower-rated collateral
Lower Rating = Higher Rating Factor Rating Factors Increase Exponentially

Moody's CFR Rating Factor Moody's CFR Rating Factor 2,500 WARF Change
Aaa 1 Ba1 940 Downgrades become even +1,930
2,000 more punitive at B2->B3
Aa1 10 Ba2 1,350 +1,730 +1,570
Aa2 20 Ba3 1,766 1,500 +1,280
Aa3 40 B1 2,220
1,000 +770
A1 70 B2 2,720
+500
A2 120 B3 3,490 500 +410+416+454
+250+330
A3 180 Caa1 4,770 +9+10 +20 +30 +50 +60 +80+100
0
Baa1 260 Caa2 6,500
Baa2 360 Caa3 8,070
Baa3 610 Ca-C 10,000
Note: Rating Factor is based on Moody’s idealized default rate for a rating over a 10 year time-horizon, multiplied by 10,000. Source for all charts: Moody’s, Barclays Research
30 22 January 2021
• Min. Weighted Average Spread (WAS) test: Weighted average nominal spread of the underlying floating-rate
assets. Attempts to ensure asset interest is sufficient to pay interest on CLO liabilities.
• Lower WAS = lower asset interest income
• Min. Weighted Average Recovery Rate (WARR) test: Weighted average recovery rate assigned to the
underlying assets, which tends to be more conservative than historical recoveries. Attempts to ensure manager
invests in assets with a certain level of expected recoveries in case of default.
• Lower WARR = lower expected recoveries on the underlying assets
• Max. Weighted Average Life (WAL) test: Weighted average remaining life of the collateral pool, not assuming
any voluntary prepayments (typically declines over time). Attempts to ensure deal amortizes over time and does
not become concentrated in longer dated assets as the deal gets closer to maturity.
• Higher WAL = longer average maturity of the collateral
WAL Tests Become Most Constraining After The Reinvestment Period Ends
WAL Test Cushion (Yrs)
2.0
1.0
Months Past Reinv. Period

0.0
-1.0
-2.0
-3.0
-36 -24 -12 0 12 24
US Europe
Source for all charts: Kanerai, Intex, Barclays Research
31 22 January 2021
• Unlike PPTs, which set strict minimums or maximums of the type of assets held by the CLO, CQTs are
moving targets based on a matrix to provide flexibility for CLO managers to trade the portfolio based
on evolving market conditions.
• Each matrix is a three-way combination grid of the criteria. For example, in a Moody’s matrix, the
combination of the current min. Diversity Score and min. WAS set the portfolio’s maximum WARF.
• Different CQTs can be used depending on the rating agency used for a deal (e.g. Fitch WARF).
• European CLO WARRs tend to be smaller versus US CLOs since European CLOs allow for more
subordinated assets such as a large bucket for bonds.
• Generally, if a deal is failing a CQT(s), the manager can continue to trade the portfolio, but must
maintain or improve the failing CQT(s) on future trades until passing again.
CQTs Based on a Moving Matrix Collateral Quality Test Comparison

Min. Diversity Score US BSL CLO European CLO
Min. WAS CQT
65 70 75 80 85 90 Value Limit Value Limit
3.20% 2,433 2,449 2,464 2,475 2,487 2,497 WAS 3.56 3.30 3.80 3.60
3.30% 2,505 2,523 2,539 2,552 2,565 2,576
WAL 5.1 8.5 5.4 8.0
3.40% 2,525 2,544 2,592 2,628 2,642 2,654
Moody’s Diversity Score 75 65 50 46
3.50% 2,549 2,594 2,640 2,677 2,693 2,706
Moody’s WARF 2,801 2,997 2,877 3,021
3.60% 2,571 2,616 2,688 2,725 2,744 2,757
3.70% 2,594 2,639 2,737 2,772 2,790 2,803
Fitch WARF N/A N/A 32 34
3.80% 2,638 2,684 2,786 2,818 2,835 2,849 Moody’s WARR 48 43 46 43
3.90% 2,694 2,719 2,828 2,865 2,882 2,896 Fitch WARR N/A N/A 67 64
4.00% 2,807 2,839 2,871 2,912 2,928 2,942 S&P WARR 44 42 38 36
Source for all charts: Deal documents, Kanerai, Intex, Barclays Research
32 22 January 2021
Coverage Tests
• Coverage tests typically include an Overcollateralization (OC) and Interest Coverage (IC) test for
most tranches.
• If a tranche’s coverage tests fails, interest that would have been paid to tranches more junior are
diverted to redeem the senior notes sequentially until the coverage tests pass again.
• CLOs may also have an Interest Diversion (ID) test (also known as Reinvestment Test), where
cash is used to purchase more collateral instead of amortizing the CLO notes.
• The ID test is set just above the lowest tranche OC test, meaning the ID test will trip first. When it
trips, ~50% of cash that would have gone to equity is instead used to purchase more collateral.
• Actual calculations are deal-dependent and can be found in the CLO deal documentation.
Overcollateralization (OC) Test Interest Coverage (IC) Test
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 (𝑛𝑛𝑛𝑛𝑛𝑛 𝑜𝑜𝑜𝑜 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒)

𝑃𝑃𝑃𝑃𝑃𝑃 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝐶𝐶𝐶𝐶𝐶𝐶 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 (𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑎𝑎𝑎𝑎𝑎𝑎 𝑎𝑎𝑎𝑎𝑎𝑎 𝑠𝑠𝑠𝑠𝑠𝑠 𝑡𝑡𝑡𝑡 it) 𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑑𝑑𝑑𝑑𝑑𝑑 (𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑎𝑎𝑎𝑎𝑎𝑎 𝑎𝑎𝑎𝑎𝑎𝑎 𝑠𝑠𝑠𝑠𝑠𝑠 𝑡𝑡𝑡𝑡 it)
Minimum OC
Equity gets
CLO Collateral
Adjusted Test Passed
debt Collateral
Portfolio
residual
Portfolio
Minimum OC
Equity gets
nothing until
Collateral
CLO
Adjusted Test Failed
Portfolio
debt
Collateral coverage test
Portfolio is cured
33 22 January 2021
OC Test Haircuts
• The OC numerator holds most assets at par for calculations, but riskier assets are “haircut”.
• Typical OC haircuts can include:
• CCC/Caa assets above 7.5% → excess over 7.5% held at market value (excludes def.)
• Defaulted asset → held at lower of market value and assigned recovery value
• Asset bought below ~80% → held at purchase price
• Equity received from reorg → held at zero
• Asset maturing after CLO maturity → held at lower of market value and ~70%
• We estimate for a new deal, CCC exposure would have to rise to the mid-teens for the OC test
on the junior most tranche to fail – but lower if defaults and par losses also increase.
CCC Haircut Example – Excess Uses Lowest MV First
10.0% CCC % of CCC Current Price

asset bucket price used for
CCC Limit 7.5% OC test*
CCC Loan A 2.5% $90 $100
Bucket Loan B 2.5% $85 $100
Loan C 2.5% $70 $100
Loan D 2.5% $50 $50
*Assumes assets purchased above $80. Source for all charts: Deal documents, Barclays Research
34 22 January 2021
OC Test Example
Scenario #1 Scenario #2 Scenario #3
Lowest OC Test Cushion
(ex. BB tranche) +389bp +47bp -2bp
Interest Diversion Test
Cushion +339bp -3bp -52bp
CCC Assets % 2.4% 10.0% 10.6%
Defaulted Assets % 0.2% 4.0% 4.3%
Asset Portfolio Asset Portfolio Asset Portfolio
Interest Interest Interest
Taxes, Fees, etc. Taxes, Fees, etc. Taxes, Fees, etc.
Snr. Mgmt. Fee Snr. Mgmt. Fee AAA Snr. Mgmt. Fee
Principal
AAA Interest AAA Interest AAA Interest
AA Interest AA Interest AA Interest

. . .
CLO . CLO . CLO .
debt debt debt
. . .
BB Interest BB Interest BB Interest
Sub. Mgmt. Fee 50% 50% 100% 0%

Sub. Mgmt. Fee Sub. Mgmt. Fee
Equity Holder
Equity Holder Equity Holder
Note: Assumes CCC and defaulted assets held at $50. Source for all charts: Deal documents, Barclays Research
35 22 January 2021
Table of Contents
• Overview
• Structure
• Portfolio Tests
• CLO Managers
• Regulation
36 22 January 2021
Overview
Leveraged loans are the main source of CLO collateral, making up most collateral pools for US CLOs and
~85% of European CLO collateral pools
Broadly Syndicated Loans (BSL) Senior Secured HY Bond Unsecured HY Bond
Coupon: Floating (Libor/Euribor + ) Mostly fixed, some FRN Fixed
Maturity: 5-7 years 5-7 years 7-10 years
Typically 1yr for FRN, 2-5yr for

Non-Call Period: 6-12 month soft call Typically 3-5 years
Fixed
Usually 101 during soft call, par After non-call. Can have make- After non-call. Can have make-
Prepayment:
after whole before whole before
Financial Covenants Mostly incurrence now (cov-lite) Incurrence only Incurrence only
Security: Secured by assets of the Issuer Secured by assets of the Issuer Unsecured
Historical Recovery
~67% for 1st lien, ~33% for 2nd lien ~55% ~38%
Rates:
Larger facilities publicly rated,
Rating: smaller have private/shadow Publically rated Publically rated
ratings
Documentation: Bespoke Fairly standardised Fairly standardised
Disclosure: Typically private – to lenders only Mostly public Mostly public
Note: Recoveries are average issuer-weighted recoveries from 1983-2019. Source for all charts: Moody’s, Barclays Research
37 22 January 2021
Broadly Syndicated Leveraged Loans
Typical Capital Structure General Characteristics
• Leveraged loans are used to finance the senior

parts of the capital structure of:
• Leveraged buyouts (LBO) or mergers and

Typically held on
bank balance sheets Revolver/TL A acquisitions (M&A)
• Sub-investment grade, fallen angel and cross-

Typical CLO over credits
collateral Term Loan B
• Leverage loan features:
Only small • Floating rate instruments
allocations allowed • Relative insensitivity to interest rate
in most CLOs
Bond
movements
• Short non-call
Small buckets for
2nd liens Second-lien • Flexibility to refinance when spreads tighten
• Diversification
CLOs can’t buy, but • Access to credits/sectors beyond the public
can receive in lieu of Equity markets
debt from a
reorganization • Higher recoveries
• Security on the assets of the company and
seniority in the capital structure
38 22 January 2021
CLO Industry Exposure
• Industry exposure in CLOs tends to closely match the overall loan indices.
• In the US, this is the S&P/LSTA Leveraged Loan Index (LLI – BBG:SPBDALB Index)
• In Europe, this is the European Leveraged Loan Index (ELLI – BBG:SPBDELB Index)
Top US BSL CLO Industry Exposure Top European CLO Industry Exposure
Median CLO Median CLO
Industry Industry
Exposure Exposure
1 Healthcare & Pharmaceuticals 10.3% 1 Healthcare & Pharmaceuticals 14.9%
2 High Tech 10.0% 2 Services: Business 8.1%
3 Banking, Finance, Insurance & Real Estate 8.6% 3 Chemicals, Plastics & Rubber 8.0%
4 Services: Business 8.4% 4 High Tech 7.5%
5 Telecommunications 5.5% 5 Telecommunications 6.1%
6 Media: Broadcasting & Subscription 5.5% 6 Hotels, Gaming & Leisure 5.9%
7 Hotels, Gaming & Leisure 5.1% 7 Banking, Finance, Insurance & Real Estate 5.0%
8 Chemicals, Plastics & Rubber 4.0% 8 Beverage, Food & Tobacco 4.6%
9 Services: Consumer 3.7% 9 Construction & Building 4.5%
10 Construction & Building 3.4% 10 Retail 4.4%
11 Beverage, Food & Tobacco 3.3% 11 Services: Consumer 4.4%
12 Capital Equipment 3.2% 12 Capital Equipment 4.0%
13 Automotive 2.9% 13 Media: Broadcasting & Subscription 3.2%
14 Containers, Packaging & Glass 2.9% 14 Automotive 2.7%
15 Aerospace & Defense 2.6% 15 Containers, Packaging & Glass 2.5%
Note: Data as of January 2021. Source for all charts: Kanerai, Intex, Barclays Research
39 22 January 2021
CLO Issuer Exposure
• CLOs hold 100-200+ issuers, with positions rarely making up more than 1-2%
• Leveraged loans are issued by commonly known companies like Dell or Ziggo
Top US BSL CLO Issuer Exposure Top European CLO Issuer Exposure
Total Bal. Median % Total Bal. Median %
Issuer in CLOs in Deals Issuer in CLOs in Deals
($mm) with Exp. (€mm) with Exp.
1 CenturyLink 2,997 0.60% 1 Flora Food Group 1,377 1.13%
2 Dell Technologies 2,622 0.55% 2 EG Group Limited 1,257 1.13%
3 Berry Plastics Group 2,516 0.48% 3 Nidda Healthcare Holding 1,236 0.99%
4 Starfruit Finco B.V. 2,500 0.50% 4 Lorca Finco 1,167 1.00%
5 Panther BF Aggregator 2 LP 2,434 0.49% 5 Springer Science & Business 1,143 1.14%
6 Bass Pro Group 2,421 0.58% 6 Ziggo 1,142 1.01%
7 Scientific Games 2,346 0.51% 7 ION Trading Technologies 1,129 1.09%
8 Zayo Group 2,326 0.47% 8 Ceva Sante Animale 1,102 0.91%
9 TransDigm 2,212 0.44% 9 Action Holdings 1,073 1.02%
10 Envision Healthcare 2,167 0.50% 10 Panther BF Aggregator 2 LP 997 0.92%
11 Diamond Sports Group 2,153 0.50% 11 Auris Luxembourg III 995 0.93%
12 Brookfield WEC Holdings 2,117 0.50% 12 Starfruit Finco B.V. 976 0.82%
13 RegionalCare Hospital Partners 2,090 0.53% 13 Ahlsell AB (publ) 974 0.83%
14 Caesars Resort Collection 2,073 0.49% 14 LSF10 XL Bidco SCA 914 0.96%
15 Virgin Media 1,970 0.45% 15 Financial & Risk US Holdings 898 1.00%
Note: Data as of January 2021. Source for all charts: Kanerai, Intex, Barclays Research
40 22 January 2021
Loan Supply, Outstanding and Primary Buyers
US Leveraged Loan Supply European Leveraged Loan Supply

500 New US Loan Supply ($bn) New EU Loan Supply (€bn) 97
100
402 80
400 373 388
344 80 70
287 296 56
300 254 276 60 49 55
234
37 40
200 166 40
21
100 20 13
0 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
LBO M&A Refi Recap Other LBO M&A Refi Recap Other
Outstanding Loan Market Size CLOs Purchases of Primary Loan Market

$1,200 Par Amount Outstanding ($bn for US, €bn for Euro) € 300 70% CLO Purchases of Primary Loan Market %
1,074 61%
60%
$1,000 € 250
50% 49%
$800 235 € 200
40%
$600 € 150
30%
$400 € 100
20%
$200 € 50 10%
$0 €0 0%
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Perf. LLI ELLI (RHS) US Europe
Note: New loan supply is ex-repricing. Source for all charts: S&P LCD, Kanerai, Intex, Barclays Research
41 22 January 2021
Loan Holder Base
US Loan Market Holder Base
2-4%
1-3%
2-4%
2020 65-70% 14-18% 7-9%
Change in
-1.0%
Unch
Unch
+3.5% +0.5% -3.5%
Mid Point
3-5%
1-3%
2-4%
2019 62-66% 13-18% 10-13%
CLOs & Warehouses (ex-Middle Market) Hedge Funds/TRS/Separate Accounts Loan Mutual Funds & ETFs
Non-Loan Mutual Funds/BDCs Insurance (P&C & Life) Other (Banks, etc.)
European Loan Market Holder Base
1-3%
0-1%
2020 52-53% 32-38% 8-12%
Change in
Unch
Unch
+6% -5% -1%
Mid Point
1-3%
0-1%
2019 46-47% 38-42% 9-13%
CLOs & Warehouses Asset Managers/Separate Accounts/Hedge Funds Banks & Other Insurance (P&C & Life) Retail Funds
For more detail, see “CLOs Continue to Take Demand Share from Retail,” 30 October 2020 and “Piecing Together Demand Through Supply,” 30 October 2020.
Source for all charts: S&P LCD, Lipper, BOE, ESMA, Fitch, Bloomberg, EPFR, HFR, Creditflux, Federal Reserve, Refinitiv, Kanerai, Bloomberg Barclays Indices, Barclays Research
42 22 January 2021
New Issue Loan Credit Stats
US New Issue Leverage European New Issue Leverage

Avg. Debt Multiples Avg. Debt Multiples
6.0x 6.0x
5.1x 5.4x
5.0x 5.0x
4.0x 4.0x
3.0x 3.0x
2.0x 2.0x
1.0x 1.0x
0.0x 0.0x
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
1st lien 2nd lien Other 1st lien 2nd lien Other
New Issue Interest Coverage Cov-Lite % of Loan Index

Avg. Interest Coverage 4.7x 100% % of Index Cov-lite
5.0x
87%
4.5x
4.0x 80% 83%
3.5x
3.5x
3.0x 60%
2.5x
2.0x 40%
1.5x
1.0x 20%
0.5x
0.0x 0%
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
US Europe US Europe
Source for all charts: S&P LCD, Barclays Research
43 22 January 2021
Loan Market Stats
Average Bid Price New Issue Spreads

Avg. Bid Price ($) Wtd. Avg. New-Issue Spreads (bp)
105 600
95 500
400 417
85 403
300
75
200
65 S&P/LSTA Lev. Loan Index (BBG:SPBDALB Index)
100
European Lev. Loan Index (BBG:SPBDELB Index)
55 0
Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13 1Q15 1Q17 1Q19
US Europe US Europe
US Loan Market Ratings European Loan Market Ratings

Index by Facility Rating (at par) Index by Facility Rating (at par)
100% 100%
9% 9%
80% 19% 80% 23%
60% 60%
25% 36%
40% 40%
13%
10% 20% 16%
20% 5% 7%
6% 2%
0% 8% 0% 4%
1%
BBB+, BBB, BBB- BB+ BB BB- B+ B B- CCC D NR BBB+, BBB, BBB- BB+ BB BB- B+ B B- CCC D NR
44 22 January 2021
Loan Market Stats
Default Rates Downgrade Rates

12% TTM Loan Market Default Rate (by principal amount) Rolling 3-Mo. Downgrade %
30%
10% 25%
8% 20%
6% 15%
4% 3.8% 10%
2.6% 6.5%
2% 5% 4.6%
0% 0%
US Europe US Europe
Maturity Breakdown Repayment Rates

Loan Market Maturity Breakdown (%) 60% TTM Loan Market Repayment Rate
30% 28%
25% 25% 24% 50%
25% 22%
22%
40%
20%
16%
30%
15%
9% 19.9%
10% 10% 20%
8%
5% 4% 3% 10%
2% 1% 12.2%
0%1% 0% 0%
0% 0%
2021 2022 2023 2024 2025 2026 2027 2028 2029 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
US Europe US Europe
45 22 January 2021
Asset Recovery Rates
• Historical 1st lien loan recovery rates have averaged slightly under 70% in the US and Europe.
• But we think recoveries will be lower going forward due to higher starting leverage, more secured
debt, less junior debt, and greater adjustments to EBITDA that have often not been realized.
• We believe that over a full cycle, recoveries could be as much as 10pts lower than in previous
cycles ($55-60).
• Recoveries can also be dispersed depending on the holder type – specifically CLOs.
• Since CLOs tend to sell down their positions as a company becomes stressed, due to CCC or
defaulted asset constraints, and CLOs typically cannot purchase bridge loans, defaulted assets,
or equity securities, CLOs are often not in control of the DIP process, and the consequences can
be detrimental for their recoveries.
US Loan and Bond Recovery Rates European Asset Recovery Rates

100% Avg. Annual Recovery Rate (%) Avg. Recovery Rate (%)
80%
69.7%67.1%
70%
80%
60% 53.7%
61% 50.7% 49.1%
60% 50% 45.9%
60%
40% 38.7% 37.6%
40%
30%
32% 20%
20%
10%
0% 0%
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 1st lien Loan Snr. Unsec. Loan Snr. Sec. Bond Snr. Unsec. Bond
1st lien Loan Snr. Sec. Bond Snr. Unsec. Bond Europe Global
For more detail, see “Recoveries: No One Size Fits All for Default Losses” 9 September 2020. Note: EU recoveries based on 1998-2017 data. Source for all charts: Moody’s, Barclays Research
46 22 January 2021
Table of Contents
• Overview
• Structure
• Portfolio Tests
• CLO Managers
• Regulation
47 22 January 2021
CLO Manager Overview
• CLO managers, typically affiliates of asset managers, credit funds and insurers, are responsible for trading the
portfolio with the goal of maximising returns to CLO investors through asset selection.
• Managers not only must have exceptional credit picking skills, but also have the proficiency and resources to
manage the portfolio within a CLO structure.
• CLO investors closely monitor managers’ strategy, track record, years of experience and platform size, creating
market perception of a manager which can affect debt pricing for new deals.
• In order to understand a manager’s incentives when trading the portfolio, as well as longevity in a sustained
downturn, we encourage investors to analyze how a manager is compensated for a deal (do they own equity in
the deal?) and their dependence on management fees.
• CLO managers can resign or typically be removed for cause, which usually includes a willful violation of the
deal documents, an Event of Default, or an unresolved “Key Person” departure.
US BSL CLO Managers European CLO Managers

CLO Bal. Outstanding by Manager ($bn) Cumulative Deal Balance CLO Bal. Outstanding by Manager (€bn) Cumulative Deal Balance
30 100% 10 100%
90% 9 Top 50 = 98% 90%
25 80% 8 80%
Top 50 = 77% Top 25 = 73%
20 70% 7 70%
60% 6 60%
Top 25 = 54%
15 50% 5 50%
Top 10 = 45%
40% 4 40%
10 30% 3 30%
Top 10 =29%
5 20% 2 20%
10% 1 10%
0 0% 0 0%
1 11 21 31 41 51 61 71 81 91 101 111 121 1 11 21 31 41 51
Note: Post-2010 vintages only. Source for all charts: Kanerai, Intex, Barclays Research
48 22 January 2021
US BSL CLO Managers
New Managers (Post-GFC) US BSL CLO Managers by Deal Balance
• New US BSL CLO managers in 2020: Manager # Bal. ($bn)
• Gulf Stream Asset Mgmt. 1 Credit Suisse Asset Mgmt. 42 25.7
• Jocassee Partners 2 GSO/Blackstone Debt Funds 40 22.0
• New Mountain Capital
3 CIFC Asset Mgmt. 38 21.8
• Silver Rock Mgmt.
4 Octagon Credit Investors 35 20.0
• AllianceBernstein
• PIMCO 5 Carlyle Investment Mgmt. 35 19.4
• FS Structured Products Advisor 6 PGIM 36 19.4

7 Ares CLO Mgmt. 33 18.1
8 MJX Asset Mgmt. 29 16.6
9 Voya Alternative Asset Mgmt. 29 15.0
Total Manager Count 10 Sound Point Capital Mgmt. 25 14.9
US BSL CLO Manager Count (New Issue Only) 11 First Eagle Alternative Credit 30 14.4
120
97 12 Apollo Capital Mgmt. 21 14.4
100 93 91
84 84 13 Neuberger Berman Investment Advisors 25 12.2
77
80 69
14 Anchorage Capital Group 25 11.9
60
15 Sculptor Loan Mgmt. 22 11.6
40 16 BlueMountain/Assured 25 11.2
18
20 7 6 9 7 17 KKR Financial Advisors II 21 10.9
5 5
0 18 CBAM CLO Mgmt. 12 10.3
2014 2015 2016 2017 2018 2019 2020
19 CVC Credit Partners 23 10.0
New 2.0 Manager Total Managers Issued
20 Oak Hill Advisors 20 9.8
Note: Total count includes new managers. Source for all charts: Intex, LCD, Barclays Research
49 22 January 2021
European CLO Managers
New Managers (Post-GFC) European CLO Managers by Deal Balance
• New European CLO managers in 2020: Manager # Bal. (€bn)
• CBAM 1 GSO/Blackstone Debt Funds 22 8.9
• BlueBay Asset Mgmt. 2 PGIM 17 7.6
• AlbaCore Capital
3 CELF Investment Advisors 17 7.5
• Palmer Square
4 Investcorp Credit Mgmt. 17 6.9
• Bridgepoint Credit
5 KKR Credit Advisors 13 5.9
6 CVC Credit Partners Group 14 5.8
7 Alcentra 13 5.5
8 Credit Suisse Asset Mgmt. 11 5.1
9 Intermediate Capital Group 11 4.7
Total Manager Count 10 Barings 10 4.3
European CLO Manager Count (New Issue Only) 11 BlackRock Investment Mgmt. 10 4.1
60
50 12 Apollo Credit Mgmt. 10 4.0
50 43
40 13 Ares European Loan Mgmt. 9 3.8
40
29 31 14 Cairn Loan Investments 10 3.5
30 24
15 Oaktree Capital Mgmt. 8 2.8
20 17
10 16 Bain Capital Credit 7 2.7
7 6 8
10 4 4 5 17 Sculptor Europe Loan Mgmt. 6 2.5
0 18 Partners Group Mgmt. 6 2.4
2014 2015 2016 2017 2018 2019 2020
19 Five Arrows Managers 6 2.3
New 2.0 Manager Total Managers Issued
20 GLG Partners 6 2.3
Note: Total count includes new managers. Source for all charts: Intex, LCD, Barclays Research
50 22 January 2021
CLO Management Fees
• The CLO manager is paid a fee for managing the pool of assets:
• Senior Fee (~15bp) – aid near the top of the waterfall, typically after deal fees
• Subordinate Fee (~25-35bp) – Paid just before equity holders, so susceptible to shortfall if OC or
ID tests are failing. This fee accumulates until the test is passing again
• Incentive Fee – Paid when the equity IRR exceeds a specified return hurdle - typically 12% with
the initial price for IRR provided in deal documents. Once exceeded, typically 20% of the excess
cash that would go to equity holders instead goes to the manager. The fee is back-end loaded,
though, and usually only kicks in when the deal is called or in run-down
• Management fees have declined over time as a way to enhance the initial equity arb, though the data
does not capture any fee rebates or side letters.
US BSL CLO Total Management Fees European CLO Total Management Fees
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
Q1 '16 Q1 '17 Q1 '18 Q1 '19 Q1 '20 Q1 '16 Q1 '17 Q1 '18 Q1 '19 Q1 '20
<40bp 40-50bp 50bp <40bp 40-50bp 50bp
Note: Data by new issue deal closing dates, includes senior and subordinate fee. Percentage based on deal count. Source for all charts: Kanerai, Intex, Barclays Research
51 22 January 2021
CLO Manager Strategy Analysis – The Vision
• Each manager has their own strategy for managing the pool of loans and bonds. While a manager may
attempt to apply a similar strategy as used for similar funds at their firm, CLOs likely contain more
restrictive limits which need to be considered (CQTs, PPTs, OC tests, etc.).
• Thus, investors should understand what the manager’s strategic vision is for their CLOs, how the
manager is attempting to achieve such, and whether they have been successful in implementing
this strategy.
• At a higher level, some managers aim to be more conservative by buying low-spread, high-rated
assets (“debt friendly”), some take the opposite approach to generate high equity returns (“equity
friendly”), while others prefer a middle-of-the road approach.
• Besides speaking with the manager, investors can determine a manager’s high-level strategy by
comparing the average rating versus the average coupon of the underlying assets in their CLOs.
WARF vs WAS in US BSL CLOs WARF vs WAC in European CLOs
3,600 Moody's WARF More aggressive 3,700 Moody's WARF More
3,500 managers 3,600 aggressive
managers
3,400 3,500
3,300 3,400
3,200 3,300
3,100 3,200
3,000 3,100
2,900 3,000
2,800 2,900
2,700 More conservative 2,800 More conservative
managers Derived WAS managers Gross WAC
2,600 2,700
300 320 340 360 380 400 420 350 360 370 380 390 400 410 420
Note: Only managers with at least two deals in reinvestment. Gross WAC used for European CLOs to account for bond coupons. Source for all charts: Kanerai, Intex, Barclays Research
52 22 January 2021
CLO Manager Strategy Analysis – The Implementation
• With an idea of what the high-level strategy is and how that compares versus other managers,
investors need to take their analysis a step further to determine how a manager is attempting to
achieve that strategic vision.
• Some managers may appear conservative (relatively low WARF/low WAS) but have very
different underlying risks in their portfolios versus managers with a similar strategy.
• In the example below, two deals with a similar WARF and WAS are shown, but the makeup of
each portfolio is quite different.
• The same analysis should be taken on other metrics as well, such as asset diversity and
liquidity, to identify potential tail risks in the portfolios.
Dispersion in Asset Spreads Dispersion in Asset Ratings

Asset Par % WAS Asset Par % Moody's WARF
35% 45%
31% Deal #1: 331bp 38% Deal #1: 3,100
30% Deal #2: 331bp 40% Deal #2: 3,177
24% 24% 35%
25% 28%
30%
20% 17%16% 25%
15% 15% 15% 20%
15% 13% 20% 18%
11% 14%
9% 9% 15% 12% 11%
10% 9% 9% 10% 8%
10% 6% 7%
5% 5% 2% 3%
1%
0% 0%
<250 250-299 300-349 350-399 400-449 450+ >=Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa%
Deal #1 Deal #2 Deal #1 Deal #2
Note: Percentage based on most used asset ratings, not deal defined ratings. Source for all charts: Kanerai, Intex, Barclays Research
53 22 January 2021
CLO Manager Strategy Analysis – The Results
• While a conservative or aggressive approach can imply a certain level of par build or equity
distributions, there is not a perfect correlation. Active manager trading, especially in a period of
volatility, debt execution and vintage effects can lead to a large dispersion in performance.
• Further, some manager strategies are better suited to certain credit environments versus others.
• As we saw in H1 20, managers that had fewer tail risks tended to outperform in OC test cushion
change – but the R-squared was still well below one.
• And while managers that had higher tails risks tended to see more losses, they also were more likely to
produce higher equity returns in the year prior.
• Thus, CLO investors need consider a manager’s strategy and performance over the long term, and
may want to contemplate diversifying their portfolios with exposure to different manager strategies.
Initial Positioning Doesn’t Fully Explain Performance Higher Tail Risk Produces Higher Equity Distributions
Jnr. OC Test Cushion Change in H1 ‘20 (bp) 25% '19 Median Equity Distributions (Ann.)
100
Starting Tail Risk Score
0
20%
-100
-200 15% R² = 0.18
-300
-400 10%
R² = 0.35
-500
Some more conservative managers 5%
-600 performed worse relative to those
less conservative Jan. '19 Relative Tail Risk Score
-700 0%
0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%
For more detail, see “H1 Manager Performance Review: US BSL CLOs” 11 September 2020 and “H1 Manager Performance Review: European CLOs” 4 September 2020. Note: Managers with two
reinvesting deals only. Tail risk considers relative exposure to higher spread, lower rated, lower priced and lower liquid assets. Source for all charts: Kanerai, Intex, Markit, Barclays Research
54 22 January 2021
Table of Contents
• Overview
• Structure
• Portfolio Tests
• CLO Managers
• Regulation
55 22 January 2021
CLO Tranche Investor Overview
Rating Investor Types Investor Priorities Investor Concerns
Banks • Reinvestment risk due to uncertainty

• Safety of principal
Asset Managers regarding timing of principal repayment
AAA-AA • Predictability of amortization
Insurers • Strength of indenture language limiting
speed
manager latitude after reinvestment period
Pensions
Asset Managers • Safety of principal • Reinvestment risk due to uncertainty

Insurers • Predictability of amortization regarding timing of principal repayment
A-BBB
Pensions speed • Strength of indenture language limiting
• Secondary market liquidity manager latitude after reinvestment period
Credit Funds
• Credit loss avoidance • Collateral portfolio composition and

Asset Managers
• Acceleration of discount potential tail risks
BB-B Pensions
amortization • Manager track record for uninterrupted
Credit Funds payments to all liability tranche holders
• Secondary market liquidity
Asset Managers
CLO Managers • Credit loss avoidance • Collateral portfolio composition and
growing tail risks
Credit Funds • Residual cash flow
Equity maximization • Manager track record for maintaining
BDCs equity distributions
• Maintaining leverage & low
Insurers (e.g. combo notes) cost of debt • Manager risk retention
Risk Retention Vehicles
56 22 January 2021
CLO Ownership Breakdown
• Banks, insurers, asset managers and pension funds are the largest holders of CLO tranches.
• Most of these investors purchase tranches in the new issue market and typically hold them for
the life of the deal.
• Buying a new deal allows an investor to acquire larger allocations and negotiate document
stipulations, though most of time the initial portfolio is only hypothetical.
• Investors may also purchase CLO tranches in the secondary market, typically through a BWIC
process. The underlying portfolio of secondary opportunities can be quickly identified and priced,
but ticket sizes are typically smaller than primary opportunities.
• BWIC stands for “Bids Wanted in Competition”; an auction style process to buy and sell tranches
through dealers.
Global CLO Ownership Base Breakdown
9-12%
8-12%
5-10%
2020 30-34% 23-26% 14-17%
Change in
Unch
Unch
Mid Point -2% +1% +2% -1%
10-13%
8-12%
5-10%
2019 32-36% 22-25% 12-15%
Collateral
Banks Portfolio
Insurers Asset Mgrs/MF/SMA Pensions HF/CLO Mgrs Other
For more detail, see “Global Ownership Shifts on the Edges” 30 October 2020. Source: BOE, BOJ, Fed, FDIC, Lipper, HFR, NAIC, Fitch, Bloomberg, Company financials, Barclays Research
57 22 January 2021
CLO AAA-AA Tranche Profile
• CLO AAA tranches account for nearly 60% of the ratings stack, meaning the AAA buyer base is, by
definition, larger in size than all other tranches combined.
• Banks across the globe continue to be the largest holders of CLO tranches, where a vast majority of
their holdings are concentrated in AAA tranches (~60% of global CLO AAA tranches). Insurers’
participation in AAs is especially evident in the mix of floating versus fixed rate coupons.
• The default risk in AAA and AA tranches is considered to be very remote thanks to their significant
overcollateralization and position within the cash flow waterfall.
• Thus, these tranche buyers tend to focus less on the details of a CLO’s actual collateral portfolio and
more on factors such as manager reputation and track record, documentation strength (particularly
around post-reinvestment limitations), and expectations of secondary liquidity.
US CLO AAA/AA BWIC Activity European CLO AAA/AA BWIC Activity

% of Total BWICs
7,000 US AAA/AA BWIC Supply ($mm) % of Total BWICs 80% 3,500 EU AAA/AA BWIC Supply (€mm) 90%
6,000 70% 3,000 80%
60% 70%
5,000 2,500
60%
50%
4,000 2,000 50%
40%
3,000 1,500 40%
30%
30%
2,000 20% 1,000
20%
1,000 10% 500 10%
0 0% 0 0%
Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20
AAA AA AAA/AA Share % AAA AA AAA/AA Share %
58 22 January 2021
CLO AAA-AA Tranche Profile
• Despite the protection afforded to senior rated CLO tranches through higher credit enhancement,
typically non-deferrable status (missed interest payment would cause an EOD) and an history of
strong performance (no AAA or AA tranches have taken a loss), AAA/AA CLO tranches have
remained wide versus IG corporates and other structured credit.
• We think this is likely due to:
• Illiquidity of CLO tranches versus IG and HY bonds
• Uncertainty in timing of cash flows post-reinvestment
• Inability for investors to underwrite the constantly changing portfolio of assets
• Steep-learning curve of CLO deal documentation and stipulation definitions
• Trust needed for CLO manager to follow document rules and avoid strategy drift
• A similar acronym as CDOs
• Headline risks
• Short non-call period (e.g. refi risk)
• Not qualify as a High Quality Liquid Asset for banks (not STS eligible) or Solvency Type I asset
• We think these general, and other, issues provide senior CLO tranche investors that understand
the product, and are not hampered by regulatory burdens, an opportunity to find attractive highly
rated floating-rate exposure.
59 22 January 2021
European CLO AAA Embedded Euribor Floor
• Most European CLO tranches have an embedded interest rate floor of zero (similar to the underlying
loans). Thus, tranches have effectively been paying fixed rates of interest since 2015 after 3month
Euribor fell below zero.
• CLO investors thus receive an embedded Euribor floor option in new issue deals. And with 3m Euribor
now well into negative territory for the foreseeable future, the value of that option, especially at the AAA
tranche level, has become quite attractive and can drive relative value considerations.
• Essentially, the longer and deeper the 3month Euribor forward curve moves, the more the embedded
option value increases. And the shorter the duration of a tranche, the higher the value of the option.
• Investors can monetize this additional benefit by simply holding the position over the long term, or can
sell the option to an option trading desk or simply sell the bonds in the secondary market.
3 Month Euribor Forward Curve European CLO AAA vs Floor Value

Euribor (%) Generic Primary AAA DM (bp) Est. AAA Floor Value (bp)
0.5 210 50
0.3
180 40
0.1
150 30
-0.1
120 20
-0.3
-0.5 90 10
-0.7 60 0
Feb-21 Feb-23 Feb-25 Feb-27 Feb-29 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
3mo. Euribor EU CLO AAA Primary DM Est. AAA Floor Value (RHS)
Note: Estimated floor value based on most common reinvestment period length at each point in time. Source for all charts: Intex, S&P LCD, Barclays Research
60 22 January 2021
CLO AAA Tranche Relative Value
US BSL CLO AAA versus IG OAS US BSL CLO AAA versus IG OAS
Primary AAA DM and IG OAS Spread Diff. Primary AAA DM and IG OAS Spread Diff.
220 60 180 120
200 40 160 100
140 80
180 20
120 60
160 0 100 40
140 -20 80 20
60 0
120 -40
40 -20
100 -60 20 -40
80 -80 0 -60
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
AAA - IG OAS (RHS) US BSL CLO AAA US IG OAS AAA + Fl. Value - IG OAS (RHS) European CLO AAA EU IG OAS
US Versus European CLO AAA CLO AAA Spreads for Japanese Investors
Spread Diff. (bp) 100 JPY Hedged Primary CLO Spreads (bp)
180 Primary CLO Spreads (bp) 200
165
80
150 150
Median historical 60
135 difference is c.12bp
120 40 100
105
20
90 50
0
75
*EU spread includes floor value
60 -20 0
Basis (RHS) EU CLO AAA w/ Floor Hedged US BSL CLO AAA JPY Hedged US BSL CLO AAA JPY Hedged EU CLO AAA
Note: Generic CLO primary spreads. Embedded Euribor floor value due to new issue deals pricing with floors at zero, and with 3m Euribor still well below zero. Source for all charts: S&P LCD, Intex,
Bloomberg, Barclays Research
61 22 January 2021
CLO AA Tranche Relative Value
US BSL CLO AA versus IG OAS European CLO AA versus IG OAS
Primary AA DM and IG OAS Spread Diff. Primary AA DM and IG OAS Spread Diff.
260 180 250 300
240 160
200 250
220 140
200 120 200
180 100 150
150
160 80
100
140 60 100
120 40 50 50
100 20
80 0 0 0
AA - IG OAS (RHS) US BSL CLO AA US IG OAS AA - IG OAS (RHS) European CLO AA EU IG OAS
US BSL CLO AAA versus AA European CLO AAA versus AA

Primary AAA and AA DM Spread Diff. Primary AAA and AA DM Spread Diff.
250 160 250 200
230 140 230 180
210 160
210 120
190 140
190 100 170 120
170 80 150 100
150 60 130 80
110 60
130 40
90 40
110 20 70 20
90 0 50 0
AA-AAA (RHS) US BSL AAA US BSL AA AA-AAA (RHS) European AAA European AA
Note: Generic CLO primary spreads. Source for all charts: S&P LCD, Intex, Bloomberg, Barclays Research
62 22 January 2021
CLO A-BBB Tranche Profile
• Similar to AAA/AA tranches, the risk of principal loss for single-A and BBB tranches is still relatively low
due to the high original credit enhancement. However, these tranches are traditionally structured to be
PIKable, meaning interest could defer if overcollateralization tests fail.
• While banks are traditionally not buyers of A/BBB CLO tranches, asset managers, pensions and credit
funds continue to find relative value at this part of the ratings stack.
• US insurers are some of the largest investors in this part of this stack, as the spread to NAIC capital
charge is attractive for single-A and above tranches. European insurers, however, incur higher capital
charges for CLO tranches under Solvency II.
• Downgrade risks are present as IG-constrained investors could be required to sell if tranches are
downgraded below IG, especially as new CLO BBB tranches are increasingly rated with a ‘BBB-’ rating.
US CLO A/BBB BWIC Activity European CLO A/BBB BWIC Activity

US A/BBB BWIC Supply ($mm) % of Total BWICs EU A/BBB BWIC Supply (€mm) % of Total BWICs
1,600 35% 800 60%
1,400 30% 700
50%
1,200 25% 600
40%
1,000 500
20%
800 400 30%
15%
600 300
20%
400 10% 200
5% 10%
200 100
0 0% 0 0%
A BBB A/BBB Share % A BBB A/BBB Share %
63 22 January 2021
CLO A Tranche Relative Value
US BSL CLO A versus IG OAS European CLO A versus IG OAS

Primary A DM and IG OAS Spread Diff. Primary A DM and IG OAS Spread Diff.
380 300 350 450
300 400
330 250
350
250
280 200 300
200 250
230 150
150 200
180 100 150
100
100
130 50 50 50
80 0 0 0
A - IG OAS (RHS) US BSL CLO A US IG OAS AA - IG OAS (RHS) European CLO A EU IG OAS
US BSL CLO A versus AAA/AA European CLO A versus AAA/AA

Spread Difference Spread Difference
300 300
250 250
200 200
150 150
100 100
50 50
0 0
A-AAA A-AA A-AAA A-AA
64 22 January 2021
CLO BBB Tranche Relative Value
US BSL CLO BBB versus HY OAS European CLO BBB versus HY OAS
Primary BBB DM and HY OAS Spread Diff. Primary BBB DM and HY OAS Spread Diff.
1,200 150 1,000 225
100 900
1,000 150
50 800
800 0 700
75
-50 600
600
-100 500
0
400 -150 400
-200 300 -75
200
-250 200
0 -300 100 -150
BBB - HY OAS (RHS) US BSL CLO BBB US HY OAS BBB - HY OAS (RHS) European CLO BBB EU HY OAS
US BSL CLO BBB versus B Loans European CLO BBB versus B Loans
Primary BBB DM and B Loans Spread Diff. Primary BBB DM and B Loans Spread Diff.
1,600 50 700 0
1,400
-50 600 -50
1,200
1,000 -150 500 -100
800
600 -250 400 -150
400
-350 300 -200
200
0 -450 200 -250
BBB - B Loans (RHS) US BSL CLO BBB US B Loans BBB - B Loans (RHS) European CLO BBB EU B Loans
65 22 January 2021
CLO BB-B Tranche Profile
• Aside from CLO equity, junior CLO tranches (BB/B ratings) are the most exposed part of the capital stack to
declines in the underlying portfolio as these tranches have the lowest credit enhancement at issuance.
• Thus, these investors tend to scrutinize collateral portfolio composition more closely, with specific focus on tail
risks in the portfolio (e.g. exposure to below $80 assets, percentage of assets rated B3, etc.).
• Post-reinvestment amortization speed is also an important consideration because of its influence on pull-to-par.
Junior mezz is typically issued at a far greater discount than more senior tranches, giving it the best convexity
profile among CLO liabilities with built-in potential for price appreciation.
• However, this benefit comes at a cost of greater sensitivity to changes in assumptions and market conditions,
and thus price volatility. As a result, junior mezz tends to require a more tactical investment time horizon, which
corresponds fairly well to the investment style of dedicated structured credit investors.
US CLO BB/B BWIC Activity European CLO BB/B BWIC Activity

US BB/B BWIC Supply ($mm) % of Total BWICs EU BB/B BWIC Supply (€mm) % of Total BWICs
1,600 60% 900 70%
1,400 800 60%
50%
1,200 700
50%
40% 600
1,000
500 40%
800 30%
400 30%
600
20% 300
20%
400 200
10% 10%
200 100
0 0% 0 0%
BB B BB/B Share BB B BB/B Share
66 22 January 2021
CLO BB Tranche Relative Value
US BSL CLO BB vs HY OAS European CLO BB vs HY OAS

Primary BB DM and HY OAS Spread Diff. Spread Diff.
1,200 600 1,200 Primary BB DM and HY OAS 600
1,100 525
1,000 500 1,000
900 450
800 400 800 375
700
600 300 300
600
500 225
400 200
400 150
200 100 300
200 75
0 0 100 0
BB - HY OAS (RHS) US BSL CLO BB US HY OAS BB - HY OAS (RHS) European CLO BB EU HY OAS
US BSL CLO BB vs BBB and B Loans European CLO BB vs BBB and B Loans
Spread Difference
1,100 1,100 Spread Difference
900 900
700 700
500 500
300 300
100 100
-100 -100
BB-BBB BB CLO-B Loan BB-BBB BB CLO-B Loan
67 22 January 2021
CLO Equity Profile
• CLO equity is essentially a non-recourse leveraged position on a pool of actively managed loans and bonds.
Equity holders are last in line to collect proceeds after debt holders and management fees are paid, but they
directly benefit from a manager that trades the portfolio and builds par (may also be able to flush trading gains).
• Risk retention and the fact that more managers are increasingly retaining equity in new deals (or at least a
majority), has shifted a large share of CLO equity ownership from credit funds to managers and retention funds.
• The potential upside in CLO equity comes with the risk of holding a first-loss piece – the increased potential
loss of investment (e.g. a negative IRR). Even so, the return profile of CLO equity (front-loaded excess cash
flows with a large principal pay-out at deal’s end) helps mitigate this risk.
• Thus, equity returns can be thought of as two cash flows: the interest-only (IO) stream, and the longer-term
principal-only (PO) stream, where equity NAV can be used as a proxy.
Example CLO Equity Return Profile

50% Equity Distribution ($/Equity Notional) Cumulative Equity Return 180%
Deal is called 160%
40% 140%
Principal-only 120%
30% (PO) portion
100%
Interest-only (IO) portion
80%
20%
60%
10% 40%
20%
Collateral
0% 0%
Q1 Q3 Q5 Portfolio
Q7 Q9 Q11 Q13 Q15 Q17 Q19 Q21
Eq. Distribution Cumulative Eq. Return (RHS)
Source for all charts: Intex, Barclays Research
68 22 January 2021
CLO Equity Profile
US BSL CLO Equity Distributions (IO) European CLO Equity Distributions (IO)
Annualized Equity Distributions Annualized Equity Distributions
30% 30%
25% 25%
20% 20%
18.3% 18.6%
15% 15.6% 15% 15.2%
12.0% 12.7%
10% 10%
5% 5%
0% 0%
Q1 '15 Q1 '16 Q1 '17 Q1 '18 Q1 '19 Q1 '20 Q1 '15 Q1 '16 Q1 '17 Q1 '18 Q1 '19 Q1 '20
25th Pctle. Median 75th Pctle. 25th Pctle. Median 75th Pctle.
US BSL CLO Equity NAVs (PO) European CLO Equity NAVs (PO)
Median CLO Equity NAV Loan Index Bid $ 100 Median CLO Equity NAV Loan Index Bid $ 105
100 100
50 50 100
95
0 0 95
90
-50 -50 90
85
-100 -100 85
-150 80 -150 80
US BSL CLO Equity NAV US LLI (RHS) European CLO Equity NAV ELLI (RHS)
Note: Only reinvesting deals included. Source for all charts: S&P LCD, Intex, Markit, Bloomberg, Barclays Research
69 22 January 2021
CLO Equity Profile
• CLO equity distributions (IO) are driven primarily by the gap between a portfolio’s asset spread and the
CLO’s debt cost. This basis is generally referred to as the CLO equity “arb”, where a high “arb” is
considered an attractive time to purchase new issue CLO equity.
• Several other factors should be considered when thinking about returns for CLO equity, though,
including management and other deal fees, any fee sharing agreements, the CLO’s structural leverage,
potential reinvestment activity, the manager’s trading strategy, the future path of asset defaults and
recoveries, the ability to refi/reset tranches and more.
• These factors not only affect the IO stream, but also the long-term preservation of the portfolio’s equity
NAV (PO).
• As a result, the initial equity arb has little correlation with final CLO equity IRRs, especially as
evidenced by pre-GFC CLO equity returns.
New Issue CLO Equity Arb Initial Equity Arb vs Final Equity Returns
New Issue CLO Equity Arb (bp) 20% Median Final Equity IRR (%)
350
'07
300 '06
15%
'05 '11
250
'10
200 10%
'13 '06 '04 '12
150 '07
5% '05 '13
100 '04 '03
0%
50 '03 Initial Equity Arb (bp)
0 -5%
Jan-13 Jul-14 Jan-16 Jul-17 Jan-19 Jul-20 140 160 180 200 220 240 260 280
US BSL Europe US BSL Europe
For more detail, see “Dissecting and Forecasting the CLO Equity Arb,” 16 August 2019. Arb is ex-deal fees. IRR by deal vintage. Source for all charts: Kanerai, Intex, S&P LCD, Barclays Research
70 22 January 2021
CLO Equity Profile
• Thus it is important to consider a wide range of potential scenarios when modeling future
CLO equity returns.
• Even though typical market assumptions include using around a 20 CPR, 2 CDR and
~70% recovery on the underlying assets, CLO equity investors will typically have their own
detailed assumptions to model future returns.
• Views on asset defaults and recoveries will have large effects on returns, with a lower
initial equity purchase price providing an extra margin of safety.
• Reinvestment assumptions can also drive long-term differences in equity returns, including
prepayment speeds and spread/price reinvestment targets.
Equity is Most Susceptible to Portfolio Losses Reinvestment Activity Can Also Drive Returns
Modelled Equity IRR % 7.0% Quarterly Equity Distribution Total Cash Return 100%
20%
6.0%
80%
10% 5.0%
Reinvesting into lower 60%
4.0%
priced assets creates
0% 3.0% higher returns 40%
2.0%
20%
-10% Annual Defaults (CDR %) 1.0%
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 0.0% 0%
$1.00 PP, 70 Recov $0.90 PP, 70 Recov $0.85 PP, 70 Recov Qtr 1 Qtr 5 Qtr 9 Qtr 13 Qtr 17 Qtr 21 Qtr 25 Qtr 29
$1.00 PP, 60 Recov $0.90 PP, 60 Recov $0.85 PP, 60 Recov $99.5 - Qtr $97.5 - Qtr $99.5 - TCR (RHS) $97.5 - TCR (RHS)
Note: Results only for illustrative purposes. Scenarios assume a 20% CPR, default recovery lag of 12 month, 50% of principal reinvestment after the reinvestment period ends and assets
reinvested at L+325bp and $99.5. Second scenario uses 2% CDR, 20% CPR, 70% recovery. ‘PP’ is purchase price. Source for all charts: Kanerai, Intex, Barclays Research
71 22 January 2021
Table of Contents
• Overview
• Structure
• Portfolio Tests
• CLO Managers
• Regulation
72 22 January 2021
Risk Retention
• Risk retention rules aim to align the interests of the original CLO collateral portfolio underwriters with
those of CLO end investors. The rules were introduced as a way of reducing the agency problems
inherent in the “originate to distribute” model practiced by many securitization originators prior to the
2008-09 crisis. However, applicability of risk retention requirements are different across the globe.
• US
• Originally effective for all US CLOs issued after December 2016, a court case brought by the LSTA
reversed the requirement for “open-market” CLOs (a majority of CLOs) to abide by risk retention
requirements. However, balance sheet and middle market CLOs are still required to retain 5% of the
deal as these deals tend to hold a majority of self-originated assets.
• Europe
• European financial institutions are only able to invest in new securitizations if the originator/sponsor
retains at least 5% of the securitized exposure.
• European regulation places the burden of compliance on the issuers, but also the investors: banks
(via CRD IV/CRR), insurers (Solvency II), alternative investment funds (AIFMD) and mutual funds
(UCITS). Non-compliance leads to penalty capital charges.
• Japan
• The Japanese Financial Services Agency (FSA) published a risk retention regime for Japanese
financial institutions in March 2019. The rule essentially requires Japanese-based buyers to perform
an in-depth analysis on the securitization to ensure the collateral was “not inappropriately formed” or
be forced to hold increased capital (up to 1250%) against the investment.
For more detail, see “CLO Regulatory Roundup,” 22 February 2019.
73 22 January 2021
Risk Retention
• The “sponsor” route requires that the collateral manager provides the retention capital and requires an
authorization under MiFID in Europe.
• An “originator” route is an alternative that allows for external capital to get involved in the retention funding,
alleviating the burden on the collateral manager, but maintaining the alignment of the interests between the
original CLO collateral portfolio underwriters (the originator) with those of CLO end investors.
• An originator is a separately capitalized entity from the CLO manager. It “originates” what will ultimately become
CLO collateral by participating in leveraged loan and high yield bond primary syndications, and also by
purchasing such assets in the secondary market. After accumulating and holding the assets for some period of
time, the originator sells the assets to a newly created CLO in exchange for cash, and then invests in a vertical
(pro-rata) or horizontal (equity) strip of the CLO capital stack.
CLO Originator Vehicle Model
Collateral
Portfolio
74 22 January 2021
Risk Retention in Europe
• The use of the “originator” route increased after the June 2016 UK referendum, as in contrast to
the “sponsor” route, the originator vehicle does not need to be authorized under MiFID, which
means that the UK leaving the EU should not affect the risk retention compliance.
• In 2020, an estimated 86% of European CLOs were issued using the “originator” route, versus
82% in 2019 and 52% in 2018.
• Those European CLO managers that chose to continue using the “sponsor” route for risk retention
likely included language in the deal documents that allow for a switch of risk retention methods to
ensure compliance in a Brexit scenario.
• We estimate 24% of US CLOs issued in 2020 were compliant with EU risk retention requirements.
European CLO Risk Retention Route US CLOs Compliant with EU RR

New Issue European CLO RR Route US CLO New Issue ($bn) % EU RR Compl.
100% 140 45%
90% 18% 24% 40%
120
80% 47% 35%
49% 52%
70% 100
30%
60% 82% 86% 80 25%
50%
40% 82% 60 20%
76%
30% 15%
51% 53% 40
20% 48% 10%
20 5%
10% 18% 14%
0% 0 0%
2014 2015 2016 2017 2018 2019 2020 '12 '13 '14 '15 '16 '17 '18 '19 '20
Sponsor Originator New Issue % EU RR Compliant (RHS)
Source for all charts: S&P LCD, Bloomberg, Barclays Research
75 22 January 2021
Volcker Rule
• The Volcker rule prohibits US banks from having an “ownership interest” in “covered funds”, which
includes private equity, hedge fund stakes and previously, CLOs that contained bond buckets.
• Despite most US CLOs choosing not to include bond buckets prior to 2020, as banks are an important
source of demand at the AAA level, the European CLO market has continued to incorporate bond
buckets across most deals due to the relatively smaller size of the leveraged loan market in Europe.
• Compliance options:
• Loan securitisation: “Loan securitisations” are exempt from the definition of covered funds. In
order to qualify as a loan securitisation, the assets of the CLO must consist solely of loans, but as
of 1 October 2020, can also include a 5% bucket for certain debt securities.
• Rule 3a-7: The CLO can be structured in accordance with rule 3a-7 of the US Investment
Company Act of 1940 – this is also an explicit exemption, although in practice the associated
restrictions on collateral management are open to interpretation.
• Voting/Non-voting: Classes of CLO notes relevant to banks are divided into three types: 1) voting
notes; 2) non-voting exchangeable notes; and 3) non-voting notes. The lack of voting rights with
respect to manager removal avoids creating an “ownership interest” from a legal standpoint.
• Post-implementation of the rule, European CLOs have mostly used the “voting/non-voting” approach.
• Following the modification of the Volcker Rule in 2020, US banks may be able to purchase CLOs that
not only have 5% bond buckets, but also potentially large buckets of non-loan assets due to a new safe
harbor for certain senior debt interests.
• However, investor concerns, rating agency criteria and other regulatory/tax considerations are likely to
result in most CLOs continuing to primarily invest in senior secured leveraged loans.
For more detail, see “Recoveries: No One Size Fits All for Default Losses,” 11 September 2020, and “Trying to Bond in a Loan-ly World,” 14 February 2020.
76 22 January 2021
Reference Rate Replacement
• Most CLO documents now have language to prevent a “fixed rate” scenario when Libor ceases (last
quote available), but variation still exists on when to transition liabilities and what the new rate will be.
• The Ice Benchmark Association (IBA) noted in late 2020 that 1m and 3m Libor rates will continue to be
published until 30 June 2023, significantly lowering the probability that deals will fall back to using a
static rate, with a majority of those deals likely to be fixed or called by then.
• When the transition does occur, though, debt investors are unlikely to feel the impact, while equity
investors could bear the brunt of any mismatch in assets and liability rates or a lag in timing.
• European CLOs will be less impacted by the transition due to the minimal number of underlying assets
that pay based on US Libor and the relative ease of transition with regards to Euribor.
Basis Between Libor and SOFR Equity More at risk in a Rate Mismatch
3M Libor to SOFR Basis (bp) Est. Equity Yield Change When Libor is 50bp Above SOFR
150 3.0%
The basis peaked at
~144bp in March 2.0%
100
1.0%
50 0.0%
-1.0%
0
-2.0%
Liab. based on Libor Liab. based on SOFR
-50 -3.0%
Jan-20 Mar-20 May-20 Jul-20 Sep-20 CLO 10% 20% 30% 40% 50% 60% 70% 80% 90%
3M Libor - SOFR Assets: SOFR SOFR SOFR SOFR SOFR SOFR SOFR SOFR SOFR
For more detail, see “An Update on Libor Cessation,” 16 October 2020. About Euribor. EMMI. Source for all charts: Bloomberg, Fitch, Barclays Research
77 22 January 2021
European Bank Risk Weights
• The European Securitization Regulation (EUSR) brought along new capital charges for banks that, in general,
have resulted in higher capital charges.
• The regulation provided for one year of grandfathering for pre-2019 issuance to continue to operate under the
older risk weight. This ended on 1 January 2020, after which all securitization carried the new risk weights.
• We expect the higher risk weights to hinder trading desks from playing an active role in lower rated CLO
tranches, potentially lowering the opportunity for CLO investors to find cheaper attractive tranches in secondary.
• However, senior rated tranches remain attractive for European buyers.
• Even on a risk-weighted asset (RWA) basis, European CLO AAA tranches offer attractive return on capital
ratios for banks compared to other credit and structured products.
Capital Multiple (New to Old Risk Weights) Under External Ratings-Based Approach
Risk Weight Multiple Change
10.0x
8.0x
6.0x
4.0x
2.0x
0.0x
Collateral
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC
Portfolio
STS Senior STS Non-Senior Non-STS Senior Non-STS Non-Senior Non-granular (non-STS) Senior Non-granular (non-STS) Non-Senior
For more detail, see “Global Securitized Products Outlook 2020,” 6 December 2019. Source for all charts: EU Regulation 2017/2401, CRR, Barclays Research
78 22 January 2021
Table of Contents
• Overview
• Structure
• Portfolio Tests
• CLO Managers
• Regulation
79 22 January 2021
CLO Historical Performance
• CLOs have performed well over time, even during periods of extreme market volatility
and high loan downgrade and default rates
• Due to CLO investor protections such as cash-diverting tests, portfolio diversification
requirements, excess spread and credit enhancement, CLO tranche default rates
have remained low, even when compared to corporates at similar rating levels and
especially CDOs.
• We present data over two specific periods to show how CLOs have performed over
time:
• Pre-GFC period – analyzing 2003-2008 vintage deal performance during and
after the GFC
• COVID-19 period – analyzing all vintages’ performance over full year 2020
• We provide data on CLO defaults, fundamentals, ratings, prices, spreads and more
for each period.
• Individual deal performance can vary depending on deal vintage, manager activity,
structural attributes and document language.
80 22 January 2021
Pre-GFC CLO Performance
• S&P data show historical CLO tranche default rates are low, even for pre-GFC vintage deals.
• S&P notes that general credit deterioration led to most of the defaults, with six of the US CLO
tranche defaults being caused specifically from market value tests (tests not found in current-day
CLOs).
• The one AA tranche to default in the US was due to the note’s interest payments being placed in
escrow by the trustee, but the tranche eventually repaid accrued interest and was paid in full.
• Defaults were low due to not only high credit enhancement and overcollateralization test
protections, but also because of the longer final maturity for CLOs (~12-13 years), allowing more
time for asset values to improve.
US CLO Tranche Defaults by Orig. Rating EU CLO Tranche Defaults by Orig. Rating
US CLOs European CLOs
Orig. Rating Tranches Defaults Default Rate Orig. Rating Tranches Defaults Default Rate
AAA 1,540 0 0.0% AAA 472 0 0.0%
AA 616 1 0.2% AA 225 0 0.0%
A 790 5 0.6% A 239 0 0.0%
BBB 783 9 1.1% BBB 290 4 1.4%
BB 565 22 3.9% BB 205 17 8.3%
B 28 3 10.7% B 11 1 9.1%
Total 4,322 40 0.9% Total 1,442 22 1.5%
Note: Pre-GFC CLO tranches rated by S&P only. US data as of mid-2020. European data as of April 30, 2020. Source for all charts: S&P, Barclays Research
81 22 January 2021
CLO vs. CDO
• Moody’s data show CLO tranche impairment rates are even lower than corporates, and especially CDOs.
• Over the past 10 years, 0% of global CLO AAA tranches took a loss versus 39% for global CDOs (ex-CLOs).
• Lessons from the CDO era:
1 Avoid mark-to-market 2 Know the underlying 3 4 Understand the buyer
Minimize correlations
vehicles assets base
High embedded Holdings of synthetic Linking a portfolio to a CDOs, SIVs and asset-
leverage and market- securities and other single factor (i.e. backed commercial
value triggers caused securitized products subprime mortgages to paper created an
cascading effects as made it difficult to price housing prices) makes it artificial demand for
assets quickly fell in the pool and judge difficult to hedge securitized products
value downside risks performance of the (including CLOs)
underlying assets
Global CLO Impairment Rates versus CDOs and Corporates

Orig. European Global CLO Global CDO Global CDO Global
US CLO Global CLO
Rating CLO LGD (ex-CLO) (ex-CLO) LGD Corporates
AAA 0.0% 0.0% 0.0% 0.0% 38.9% 26.0% 0.1%
AA 0.0% 0.0% 0.0% 0.0% 47.9% 34.6% 0.8%
A 0.1% 0.0% 0.1% 0.0% 52.8% 37.1% 2.2%
BBB 2.9% 0.0% 2.3% 0.9% 62.2% 47.9% 3.3%
BB 5.8% 4.6% 5.4% 3.3% 60.9% 46.9% 15.1%
Note: Corporate data is the 10-year cumulative issuer-weighted global corporate default rate from 1983-2019. CLO and CDO impairment and loss given default (LGD) rates by original rating and
based on 10-year cumulative data over 1993-2019. Impairments split by principal (outstanding principal write-down or loss >50bp of the tranche original balance or security carrying Ca or C rating,
even if not yet experienced an interest shortfall or principal write-down) and interest (outstanding interest shortfall >50bp of original tranche balance).
Source for all charts: Moody’s, Barclays Research
82 22 January 2021
Pre-GFC CLO Payment Stats
% of Deals Failing Jnr. Most OC Test (US BSL) % of Deals Failing Jnr. Most OC Test (EU)
70% Jnr. Most OC Test Failure % Jnr. Most OC Test Failure %

70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
All Reinvesting All Reinvesting
% of Tranches Missing Scheduled Interest (US BSL) % of Tranches Missing Scheduled Interest (EU)
Missed Scheduled Interest % Missed Scheduled Interest %
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
Q1 '08 Q1 '09 Q1 '10 Q1 '11 Q1 '12 Q1 '13 Q1 '08 Q1 '09 Q1 '10 Q1 '11 Q1 '12 Q1 '13
A BBB BB A BBB BB
Note: Scheduled interest data based on all tranches outstanding. Percentages based on count. Source for all charts: Kanerai, Intex, Barclays Research
83 22 January 2021
Pre-GFC US BSL CLO Fundamentals
Moody’s WARF CCC Assets

Moody's WARF CCC Assets %
3,200 16%
3,000 14%
12%
2,800
10%
2,600 8%
6%
2,400
4%
2,200 2%
2,000 0%
25th Pctl. Median 75th Pctl. 25th Pctl. Median 75th Pctl. LLI
Defaulted Assets Jnr. Most OC Test Cushion

Defaulted Assets % Jnr. Most OC Test Cushion
12% 8.00
10% 6.00
8% 4.00
6% 2.00
4% 0.00
2% -2.00
0% -4.00
25th Pctl. Median 75th Pctl. LLI 25th Pctl. Median 75th Pctl.
Note: Only reinvesting US BSL CLOs issued between 2003-2008. Source for all charts: Kanerai, Intex, S&P LCD, Barclays Research
84 22 January 2021
Pre-GFC European CLO Fundamentals

3,200 16%
3,000 14%
12%
2,800
10%
2,600 8%
2,400 6%
4%
2,200
2%
2,000 0%
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

12% Defaulted Assets % 8.00 Jnr. Most OC Test Cushion
10% 6.00
4.00
8%
2.00
6%
0.00
4%
-2.00
2% -4.00
0% -6.00
Note: Only reinvesting European CLOs issued between 2003-2008. Source for all charts: Kanerai, Intex, S&P LCD, Barclays Research
85 22 January 2021
Pre-GFC CLO Tranche Spread and Price History
US BSL CLO Spreads European CLO Spreads

7,000 Generic DMs (bp) 12,000 Generic DMs (bp)
6,000 10,000
5,000
8,000
4,000
6,000
3,000
4,000
2,000
1,000 2,000
0 0
AAA AA A BBB BB AAA AA A BBB BB
US BSL CLO Prices European CLO Prices

% of Par % of Par
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
AAA AA A BBB AAA AA A BBB
Source for all charts: S&P LCD, Intex, Barclays Research
86 22 January 2021
Pre-GFC CLO Tranche Rating Actions
CLO vs Corporate Downgrades CLO vs Corporate Upgrades

60% Annual Global Downgrade Rates 60% Annual Global Upgrade Rates
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19
CLO Downgrades Corporate Downgrades CLO Upgrades Corporate Upgrades
US Tranche CLO Ratings Actions European CLO Tranche Ratings Actions

European CLO Tranche Rating Transitions
60% US CLO Tranche Rating Transitions 60%
40% 40%
20% 20%
0% 0%
-20% -20%
-40% -40%
-60% -60%
-80% -80%
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19
Upgrades Downgrades* Upgrades Downgrades*
Note: *Tranche rating downgrade stats exclude defaults. Source for all charts: S&P
87 22 January 2021
Pre-GFC CLO Equity Performance
• Due to the sharp decline in asset ratings and prices, and increase in default rates, most CLOs
missed around two equity distributions in 2009, with only ~20% of deals not missing a payment.
• Despite this, distributions recovered, with 2006-07 vintage deals having the best performance.
• These vintages were able to lock in relatively cheap cost of liabilities, and mixed with a long
reinvestment period, where new asset spreads widened, coupons were amended higher (with
the covenant fee flowing to equity), and the fact that CLOs could buy discounted CLO mezz
tranches, most managers were able to increase distributions and build par.
• European CLO equity performed relatively worse than US CLO equity due to CCC buckets being
slightly higher for longer in Europe, with slightly lower CCC limitations (~5% versus 7.5% today),
lower asset recovery rates, as well as a double-dip default cycle in Europe.
Pre-GFC US BSL CLO Equity Distributions Pre-GFC European CLO Equity Distributions
Median Ann. Equity Distributions Median Ann. Equity Distributions
40% 30%
35% 25%
30%
20%
25%
15%
20%
15% 10%
10% 5%
5% 0%
0% H1 H2 H1 H1 H2 H1 H1 H2 H1 H1 H2 H1 H1 H2 H1
Q1 '07 Q1 '08 Q1 '09 Q1 '10 Q1 '11 Q1 '12 Q1 '13 Q1 '14 Q1 '15 Q1 '16 '07 '07 '08 '09 '09 '10 '11 '11 '12 '13 '13 '14 '15 '15 '16
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Note: Median equity distribution by original vintage for all deals. Source for all charts: Kanerai, Intex, Barclays Research
88 22 January 2021
CLO Equity Performance (Called Deals)
US BSL CLO Equity IRRs European CLO Equity IRRs

Median Equity IRR Median Equity IRR
25% 25%
20% 18.4% 20%

16.5%
14.1% 13.9% 15%
15% 11.7% 9.7%
10% 8.2%
9.0% 6.6%
10% 7.9% 4.8%
5.1% 5%
3.4% 0.4%
5%
0%
0% -5% -1.9%
-5% -10%
2003 2004 2005 2006 2007 2010 2011 2012 2013 2003 2004 2005 2006 2007 2013
US BSL CLO Equity Total Cash Returns European CLO Equity Total Cash Returns
Median Total Cash Return Median Total Cash Return
300% 300%
250% 220% 230% 250%

188%
200% 200% 167%
145% 150% 144% 155%
150% 124% 133% 150% 132%
119% 115%
94% 97%
100% 100%
50% 50%
0% 0%
2003 2004 2005 2006 2007 2010 2011 2012 2013 2003 2004 2005 2006 2007 2013
Note: Equity IRR assuming par purchase price for equity. Data presented by original deal vintage. Source for all charts: Kanerai, Intex, Barclays Research
89 22 January 2021
COVID-19 CLO Performance
• The volatility caused by COVID-19 in 2020 affected all credit markets, including leveraged loans and CLOs.
Despite approximately one third of the loan market in the US and Europe being downgraded in 2020, though,
CLO tranches performed as advertised.
• Even the US Government Accountably Office (GAO) noted in December, “After the COVID-19 shock in March
2020, loans suffered record downgrades and increased defaults, but the highest-rated CLO securities remained
resilient. Although regulators monitoring the effects of the pandemic remain cautious, as of September 2020,
they had not found that leveraged lending presented significant threats to financial stability.”
• Due to the increase in loan downgrades and defaults, though, WARFs increased materially and OC test
cushions eroded, leading to some tranches missing scheduled interest payments in the US. This also resulted
in tranche rating downgrades, though, they were concentrated on mezz tranches (no AAAs affected).
• European CLOs fared better largely due to fewer relative tail risk in the loan market versus the US prior to
COVID-19.
US Loan Market Cumulative Downgrades EU Loan Market Cumulative Downgrades
Cumulative Number of Downgrades 120 Cumulative Number of Downgrades
700
600 100
500 80
400
60
300
40
200
100 20
0 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2018 2019 2020 2018 2019 2020
*Agencies Have Not Found Leveraged Lending to Significantly Threaten Stability but Remain Cautious Amid Pandemic. December 2020. GAO. Source for all charts: S&P LCD, Barclays Research
90 22 January 2021
Recent CLO Payment Stats
% of Deals Failing Jnr. Most OC Test (US BSL) % of Deals Failing Jnr. Most OC Test (European)
Jnr. Most OC Test Failure % Jnr. Most OC Test Failure %
25% 25%
20% 20%
15% 15%
10% 10%
5% 5%
0% 0%
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
All Reinvesting All Reinvesting
% of Tranches Missing Scheduled Interest (US BSL) % of Tranches Missing Scheduled Interest (EU)
Missed Scheduled Interest % Missed Scheduled Interest %
25% 25%
20% 20%
15% 15%
10% 10%
5% 5%
0% 0%
Q1 '18 Q3 '18 Q1 '19 Q3 '19 Q1 '20 Q3 '20 Q1 '18 Q3 '18 Q1 '19 Q3 '19 Q1 '20 Q3 '20
A BBB BB B Equity A BBB BB B Equity
Note: Scheduled interest data based on all tranches outstanding. Percentages based on count. Source for all charts: Kanerai, Intex, Barclays Research
91 22 January 2021
Recent US BSL CLO Fundamentals

3,600 14%
3,400 12%
10%
3,200
8%
3,000
6%
2,800
4%
2,600 2%
2,400 0%
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20

Defaulted Assets % Jnr. OC Test Cushion
5% 5.00
4.50
4% 4.00
3.50
3% 3.00
2.50
2% 2.00
1.50
1% 1.00
0.50
0% 0.00
Note: Only reinvesting US BSL CLOs issued after 2010. Source for all charts: Kanerai, Intex, S&P LCD, Barclays Research
92 22 January 2021
Recent European CLO Fundamentals

3,600 14%
3,400 12%
3,200 10%
8%
3,000
6%
2,800
4%
2,600
2%
2,400 0%

Defaulted Assets % Jnr. OC Test Cushion
5% 5.00
4.50
4% 4.00
3.50
3% 3.00
2.50
2% 2.00
1.50
1% 1.00
0.50
0% 0.00
Note: Only reinvesting European CLOs issued after 2010. Source for all charts: Kanerai, Intex, S&P LCD, Barclays Research
93 22 January 2021
2020 CLO Spread and Price History
US BSL CLO Spreads European CLO Spreads

Generic Primary DM Generic Primary DM
800 775 700 650
700 600
600 500 500
500 450
400
400 320
300 245
300 245 270
180 215 200 180
200 300 160 170
98
100 132 100 105
132
0 0
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20
AAA AA A AAA AA A
US BSL CLO Prices European CLO Prices

Generic Tranche Bid Price Generic Tranche Bid Price
100 100
90 90
80 80
70 70
60 60
50 50
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21
AAA AA A BBB BB B AAA AA A BBB BB B
Note: Tranche prices from sample of 2018 vintage reinvesting CLOs. Source for all charts: S&P LCD, Intex, Kanerai, Barclays Research
94 22 January 2021
2020 CLO Tranche Rating Actions
Historical % of Tranches on Negative Watch Tranches on Neg. Watch vs. Downgraded

Tranches on Negative Watch (by Orig. Rating) US BSL European
100%
Orig. Rating Max. on Max. on
80% Downgraded Downgraded
Neg. Watch Neg. Watch
60% AAA 0.0% 0.0% 0.0% 0.0%
40% AA 0.5% 0.4% 0.0% 0.0%
A 5.5% 3.1% 0.3% 2.5%
20%
BBB 36.6% 13.7% 28.2% 6.7%
0%
BB 54.6% 32.6% 53.5% 17.6%
3/31 4/30 5/31 6/30 7/31 8/31 9/30 10/31 11/30 12/31
BBB (US) BB (US) B (US) B 80.5% 52.5% 53.5% 10.6%
BBB (EU) BB (EU) B (EU)
US BSL CLO Tranche Downgrade Severity European CLO Tranche Downgrade Severity
2020 US BSL Tranche Rating Notch Changes (Min., Max., Avg.) 2020 EU Tranche Rating Notch Changes (Min., Max., Avg.)
AA A BBB BB B AA A BBB BB B
0 0
Min. notch decline 0.0 Min. notch decline
-1 -1.0 -1 -1.0 -1.0 -1.1 -1.2
-1.3 -1.2
-1.6 -1.5
-2 -2
Average notch Average
-3 decline -3 notch decline Max. notch decline
-4 -4
-5 Max. notch decline -5
-6 -6
Note: Ratings data based on all tranches outstanding. Percentages based on tranche count. Negative Watch by at least one agency. ‘Max. on Neg. Watch’ is based on month-end approximations.
Source for all charts: Kanerai, Intex, Bloomberg, S&P, Fitch, Moody’s, Barclays Research
95 22 January 2021
Analyst Certifications and Important Disclosures
Analyst Certification(s)
I, Geoffrey Horton, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research
report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
Important Disclosures:
Barclays Research is produced by the Investment Bank of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays").
All authors contributing to this research report are Research Analysts unless otherwise indicated. The publication date at the top of the report reflects the local time where the report was produced and
may differ from the release date provided in GMT.
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Explanation of the Barclays Research Corporate Credit Sector Rating System

Overweight (OW):
For sectors rated against the Bloomberg Barclays U.S. Credit Index, the Bloomberg Barclays Pan-European Credit Index, the Bloomberg Barclays EM Asia USD High Grade Credit Index or the
Bloomberg Barclays EM USD Corporate and Quasi-Sovereign Index, the analyst expects the six-month excess return of the sector to exceed the six-month excess return of the relevant index.
For sectors rated against the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Credit Index, the Bloomberg Barclays Pan-European High Yield 3% Issuer Capped Credit Index excluding
Financials, the Bloomberg Barclays Pan-European High Yield Finance Index or the Bloomberg Barclays EM Asia USD High Yield Corporate Credit Index, the analyst expects the six-month total return
of the sector to exceed the six-month total return of the relevant index.
Market Weight (MW):
Bloomberg Barclays EM USD Corporate and Quasi-Sovereign Index, the analyst expects the six-month excess return of the sector to be in line with the six-month excess return of the relevant index.
of the sector to be in line with the six-month total return of the relevant index.
96 22 January 2021
Important Disclosures (continued)
Underweight (UW):
Bloomberg Barclays EM USD Corporate and Quasi-Sovereign Index, the analyst expects the six-month excess return of the sector to be less than the six-month excess return of the relevant index.
of the sector to be less than the six-month total return of the relevant index.
Sector definitions:
Sectors in U.S. High Grade Research are defined using the sector definitions of the Bloomberg Barclays U.S. Credit Index and are rated against the Bloomberg Barclays U.S. Credit Index.
Sectors in U.S. High Yield Research are defined using the sector definitions of the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Credit Index and are rated against the Bloomberg Barclays
U.S. High Yield 2% Issuer Capped Credit Index.
Sectors in European High Grade Research are defined using the sector definitions of the Bloomberg Barclays Pan-European Credit Index and are rated against the Bloomberg Barclays Pan-European
Credit Index.
Sectors in Industrials and Utilities in European High Yield Research are defined using the sector definitions of the Bloomberg Barclays Pan-European High Yield 3% Issuer Capped Credit Index
excluding Financials and are rated against the Bloomberg Barclays Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials.
Sectors in Financials in European High Yield Research are defined using the sector definitions of the Bloomberg Barclays Pan-European High Yield Finance Index and are rated against the Bloomberg
Barclays Pan-European High Yield Finance Index.
Sectors in Asia High Grade Research are defined on Barclays Live and are rated against the Bloomberg Barclays EM Asia USD High Grade Credit Index.
Sectors in Asia High Yield Research are defined on Barclays Live and are rated against the Bloomberg Barclays EM Asia USD High Yield Corporate Credit Index.
Sectors in EEMEA and Latin America Research are defined on Barclays Live and are rated against the Bloomberg Barclays EM USD Corporate and Quasi Sovereign Index. These sectors may contain
both High Grade and High Yield issuers.
To view sector definitions and monthly sector returns for Asia, EEMEA and Latin America Research, go to https://live.barcap.com/go/research/EMSectorReturns on Barclays Live.
Explanation of the Barclays Research Corporate Credit Rating System
For all High Grade issuers covered in the US, Europe or Asia, and for all issuers in Latin America and EEMEA, the credit rating system is based on the analyst's view of the expected excess return over
a six-month period of the issuer's index-eligible corporate debt securities* relative to the expected excess return of the relevant sector, as specified on the report.
Overweight (OW): The analyst expects the six-month excess return of the issuer's index-eligible corporate debt securities to exceed the six-month expected excess return of the relevant sector.
Market Weight (MW): The analyst expects the six-month excess return of the issuer's index-eligible corporate debt securities to be in line with the six-month expected excess return of the relevant
sector.
Underweight (UW): The analyst expects the six-month excess return of the issuer's index-eligible corporate debt securities to be less than the six-month expected excess return of the relevant sector.
Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain
circumstances including where the Investment Bank of Barclays Bank PLC is acting in an advisory capacity in a merger or strategic transaction involving the company.
Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended.
Not Covered (NC): Barclays’ fundamental credit research team does not provide formal, continuous coverage of this issuer and has not assigned a rating to the issuer or its debt securities. Any
analysis, opinion or trade recommendation provided on a Not Covered issuer or its debt securities is valid only as of the publication date of this report and there should be no expectation that additional
reports relating to the Not Covered issuer or its debt securities will be published thereafter.
97 22 January 2021
For all High Yield issuers (excluding those covered in EEMEA or Latin America), the credit rating system is based on the analyst's view of the expected total returns over a six-month period of the
rated debt security relative to the expected total return of the relevant sector, as specified on the report.
Overweight (OW): The analyst expects the six-month total return of the debt security subject to this rating to exceed the six-month expected total return of the relevant sector.
Market Weight (MW): The analyst expects the six-month total return of the debt security subject to this rating to be in line with the six-month expected total return of the relevant sector.
Underweight (UW): The analyst expects the six-month total return of the rated debt security subject to this rating to be less than the six-month expected total return of the relevant sector.
Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain
circumstances including where the Investment Bank of Barclays Bank PLC is acting in an advisory capacity in a merger or strategic transaction involving the company.
Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended.
Not Covered (NC): Barclays’ fundamental credit research team does not provide formal, continuous coverage of this issuer and has not assigned a rating to the issuer or its debt securities. Any
analysis, opinion or trade recommendation provided on a Not Covered issuer or its debt securities is valid only as of the publication date of this report and there should be no expectation that
additional reports relating to the Not Covered issuer or its debt securities will be published thereafter.
Where a recommendation is made at the issuer level, it does not apply to any sanctioned securities, where trading in such securities would be prohibited under applicable law, including sanctions
laws and regulations.
*In EEMEA and Latin America (and in certain other limited instances in other regions), analysts may occasionally rate issuers that are not part of the Bloomberg Barclays U.S. Credit Index, the
Bloomberg Barclays Pan-European Credit Index, the Bloomberg Barclays EM Asia USD High Grade Credit Index or Bloomberg Barclays EM USD Corporate and Quasi Sovereign Index. In such
cases the rating will reflect the analyst’s view of the expected excess return over a six-month period of the issuer’s corporate debt securities relative to the expected excess return of the relevant
sector, as specified on the report.
Distribution of ratings assigned by Barclays Corporate Credit Research at the issuer level:
27% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 55% of issuers with this rating category are investment banking
clients of the Firm; 77% of the issuers with this rating have received financial services from the Firm.
49% have been assigned Market Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 60% of issuers with this rating category are investment banking
24% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 64% of issuers with this rating category are investment banking
Distribution of ratings assigned by Barclays Corporate Credit Research at the bond level:
30% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 59% of bonds with this rating category are investment banking
47% have been assigned Market Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 61% of bonds with this rating category are investment banking
22% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 54% of bonds with this rating category are investment banking
98 22 January 2021
Types of investment recommendations produced by Barclays FICC Research:
In addition to any ratings assigned under Barclays’ formal rating systems, this publication may contain investment recommendations in the form of trade ideas, thematic screens, scorecards or
portfolio recommendations that have been produced by analysts in FICC Research. Any such investment recommendations produced by non-Credit Research teams shall remain open until they are
subsequently amended, rebalanced or closed in a future research report. Any such investment recommendations produced by the Credit Research teams are valid at current market conditions and
may not be otherwise relied upon.
Disclosure of other investment recommendations produced by Barclays FICC Research:

Barclays FICC Research may have published other investment recommendations in respect of the same securities/instruments recommended in this research report during the preceding 12 months.
To view all investment recommendations published by Barclays FICC Research in the preceding 12 months please refer to https://live.barcap.com/go/research/Recommendations.
Legal entities involved in producing Barclays Research:

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Barclays Bank Ireland PLC, Paris Branch (BBI, Paris)
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Barclays Bank PLC, India Branch (Barclays Bank, India)
Barclays Bank PLC, Singapore Branch (Barclays Bank, Singapore)
Barclays Bank PLC, DIFC Branch (Barclays Bank, DIFC)
99 22 January 2021
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100 22 January 2021

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BSL CLO Primer Barclays

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BSL CLO Primer Barclays

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CORE

Geoff Horton, CFA

Broadly Syndicated Loan (BSL)

Historical CLO Tranche Impairment Rates Have Remained Low

P&I Cash P&I Cash Senior Notes

(~95% of deals) • Assets purchased in primary/secondary

• Issued by banks, specialty finance companies

Balance Sheet • Used as cheaper source of funding

(~5% of deals) • Self-originated assets

US BSL CLOs Outstanding European CLOs Outstanding

• CLO liabilities are typically floating-rate, referencing 3-month Libor/Euribor (floored

New Issue Tranche Thickness New Issue CLO Comp. Highlights

Credit Enhancement Increased Post-GFC

Source for all charts: S&P LCD, Intex, Barclays Research

Interest Waterfall Principal Waterfall

OC/IC tests fail 4. Junior expenses

US BSL CLO Refi/Reset Supply European CLO Refi/Reset Supply

US BSL CLO AAA Factors European CLO AAA Factors

Source for all charts: Kanerai, Intex, Barclays Research

• A newly issued CLO will occasionally include an X tranche.

Source for all charts: Deal documents, S&P, Barclays Research

Hybrid CLOs Have Higher C/E CBO Strategies Differ Widely

Eligibility Criteria Portfolio Profile Tests The portfolio manager

Source for all charts: Deal documents, Barclays Research

Lower Rating = Higher Rating Factor Rating Factors Increase Exponentially

Months Past Reinv. Period

CQTs Based on a Moving Matrix Collateral Quality Test Comparison

Overcollateralization (OC) Test Interest Coverage (IC) Test

CCC Haircut Example – Excess Uses Lowest MV First

10.0% CCC % of CCC Current Price

Asset Portfolio Asset Portfolio Asset Portfolio

Interest Interest Interest

Taxes, Fees, etc. Taxes, Fees, etc. Taxes, Fees, etc.

AA Interest AA Interest AA Interest

Sub. Mgmt. Fee 50% 50% 100% 0%

Equity Holder Equity Holder

Broadly Syndicated Loans (BSL) Senior Secured HY Bond Unsecured HY Bond

Coupon: Floating (Libor/Euribor + ) Mostly fixed, some FRN Fixed

Maturity: 5-7 years 5-7 years 7-10 years

Typically 1yr for FRN, 2-5yr for

Documentation: Bespoke Fairly standardised Fairly standardised

Disclosure: Typically private – to lenders only Mostly public Mostly public

Typical Capital Structure General Characteristics

• Leveraged loans are used to finance the senior

• Leveraged buyouts (LBO) or mergers and

• Sub-investment grade, fallen angel and cross-

Source for all charts: Barclays Research

US Leveraged Loan Supply European Leveraged Loan Supply

Outstanding Loan Market Size CLOs Purchases of Primary Loan Market

European Loan Market Holder Base

US New Issue Leverage European New Issue Leverage

New Issue Interest Coverage Cov-Lite % of Loan Index

Source for all charts: S&P LCD, Barclays Research

Average Bid Price New Issue Spreads

US Loan Market Ratings European Loan Market Ratings

Source for all charts: S&P LCD, Barclays Research

Default Rates Downgrade Rates

Maturity Breakdown Repayment Rates

Source for all charts: S&P LCD, Barclays Research

US Loan and Bond Recovery Rates European Asset Recovery Rates

US BSL CLO Managers European CLO Managers

• FS Structured Products Advisor 6 PGIM 36 19.4

Dispersion in Asset Spreads Dispersion in Asset Ratings

Banks • Reinvestment risk due to uncertainty