I am trying to understand, in its simplest form, how the collateralized loan obligations (CLO) work.
I refer to an article in The Atlantic for those who are interested in learning about CLOs.
The way I understand how it works is similar to the CDOs as they are both types of structured credit:
There are firms who maxed out on their borrowing power and owe a lot already. They might need further financing for M&A activity or have a further investment need in positive net present value projects.
When a syndicate of banks makes loans to these troubled banks, these loans are called "leveraged loans".
The leveraged loans are packaged into CLOs where these are sliced up into different tranches for debt and equity investors usually conforming to a typical waterfall structure.
The CLO equity investors own the managed pool of bank loans while the CLO debt investors term-finance this pool.
So, when the CLO manager finances the purchase of the pool of bank loans, he or she must post collateral to ensure issuance to debt investors go smoothly. Otherwise, debt investors wouldn't jump on the bandwagon.
My Question: So, is the CLO collateral the actual leveraged loans in the pool? In other words, the coupon-producing leveraged loans in the pool themselves are posted as collateral to the debt investors? I am little confused as to how the collateral works for CLO.