CLO is a loan fund that uses investors’ money to buy business loans. These loans are largely to the companies that have a lower than investment grade rating (BB+ or lower). https://efinancemanagement.com/derivatives/clo-vs-cdo

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eFinanceManagement.com
https://efinancemanagement.com/derivatives/clo-vs-cdo
CLO vs CDO

2. 1. Meaning
2. Differences
3. Who is More Likely to Bring Banking Crises?
4. Reference
Content

3. CLO (Collateralized Loan Obligations):
CLO is a loan fund that uses investors’ money to buy business loans. These loans are largely to the companies that have a
lower than investment grade rating (BB+ or lower).
CDO (Collateralized Debt Obligations):
CDOs depend upon mortgages and other similar debt, such as bonds, credit card debt, and more. We can classify CDOs
on the basis of the type of underlying assets they represent.
Meaning

4. 1. Exposure to industries:
CDOs mainly have exposure to just one industry, i.e. the housing market. While CLOs usually have exposure to varying
industries.
2. Complexity:
CLO is relatively less intricate than CDOs.
3. Bank Exposure:
The exposure of the banking sector in CLO is relatively lesser than in CDOs.
4. Risk:
CLOs are less risky than CDOs because the former includes senior, secured loans, are diversified, and have less exposure
to derivatives and leverage.
Differences

5. 5. Default:
AAA-rated tranches of CLOs have had no default since 1994. This is, however, is not the case with CDOs. The CDO
default was a major triggering point of the 2008 financial crisis.
6. Credit default Swaps (CDS):
CDOs use CDS, and this makes CDOs more complex. CDS are basically insurance policies that protect against the losses
from riskiest tranches. CLOs, in contrast, usually don’t use CDS.
Differences

6. Following the 2008 crisis, CDOs are facing more regulations now, and thus, are not as risky as they were at the time.
Coming to CLOs, they have a less complex structure and have fewer exposures to derivatives.
One more reason why CLOs are relatively less risky because of the financial analysts. By analyzing corporate loans, the
analysts are able to come up with their verdict on the company.
All these things mean, CLOs don’t pose a risk to the overall banking system.
Who is More Likely to Bring Banking Crises?

7. Reference
To know more about it, click on the link given below:
https://efinancemanagement.com/derivatives/clo-vs-cdo