Managing Credit Risk with Synthetic Collateralized Loan Obligations
Synthetic collateralized loan obligations are a relatively recent addition to the asset management toolbox. Several large banking organizations have created synthetic CLOs over the last year. While the current list of institutions using synthetic securitizations is small, it is likely to grow significantly as synthetic CLOs gain broader acceptance. Therefore, the purpose of this article is to create a broader understanding of the purpose and use of synthetic CLOs by reviewing the evolution of synthetic CLOs and discussing supervisory guidance on the risk-based capital requirements for these transactions. However, before one can hope to understand the structure, risks, and benefits inherent in synthetic CLOs, it is necessary to have an understanding of traditional CLOs.