collateralized loan obligation

Definition

A structured security backed by a pool of leveraged loans, sliced into tranches with varying risk levels. Like a financial layer cake where the top tier is reasonably safe and the bottom is essentially a gamble on corporate junk.

Example Usage

Institutional investors bought AAA-rated tranches of the CLO, while hedge funds took the risky equity tranche hoping for outsized returns.

Origin

Structured finance product that evolved in the 1990s from earlier collateralized debt obligations.

Fun Fact

CLOs were initially feared after 2008's CDO disasters, but proponents argue they're safer because corporate loans are less correlated than mortgages.

Source: Structured finance markets

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