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LEARN MORECollateralized loan obligations (CLOs) have become a popular investment vehicle because they help diversify portfolios with investments in a pool of loans, typically leveraged loans and structured securities with tranches that offer different levels of risk and return. Portfolio managers oversee the selection, acquisition, and management of these assets to optimize the performance of the CLO fund.
Cash flows are the lifeblood of a CLO fund. They determine the distribution of income and principal, which in turn determines returns. The key concept is that distributions are paid sequentially, starting with the senior-most tranche, until each tranche has been paid in full. Equity-tranche holders effectively absorb costs and receive residual distributions once the costs have been paid.1
This is why CLOs typically have covenants that require CLO managers to test the portfolio’s ability to cover monthly interest and principal payments. Common tests include interest coverage and over-collateralization. If these tests fail, cash flows are diverted to retire loan tranches in order of seniority, illustrating the “waterfall” process.
For all these reasons, managing, reporting, and analyzing CLO portfolios require diligent monitoring of multiple risk factors, compliance with regulatory requirements, and strategic decision-making. In this blog, we will explore the challenges CLO managers face, how automated reporting and analytics address these pain points, and how CLO managers can improve portfolio management.
Why do CLO managers need to improve portfolio management?
Effective portfolio management is crucial for CLO managers and CLO funds due to the complex and dynamic nature of the underlying loan assets. CLO managers need to navigate various risks, including market risk, credit risk, and operational risk, to ensure the stability and profitability of the CLO portfolio. Additionally, CLO compliance and reporting requirements are essential for maintaining investor trust and meeting legal obligations.
Consider four of the biggest challenges that all CLO managers face:
How automation can help
Automation, together with advanced reporting analytics, can greatly enhance portfolio management in CLO funds. Here are four capabilities that make this possible:
With just these four capabilities, automation can help CLO managers significantly improve portfolio management. Automation addresses key pain points related to risk management, compliance, operational efficiency, and data analysis, empowering CLO managers to enhance decision-making, optimize portfolio performance, and ensure regulatory compliance. As the CLO industry continues to evolve, embracing automation will become increasingly crucial for staying competitive and achieving success in CLO finance.
IVP can help. Specifically, IVP Solutions for CLO Managers equip CLO managers with the technology to shift away from manual spreadsheets and run CLO funds more efficiently. With IVP, CLO managers can make smarter investment decisions, streamline complex processes, ensure compliance, and reconcile trustee reports through the power of automation.
Learn more right now or contact sales@ivp.in to schedule a live or online demo.
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