January 2022

Seeing Beyond the Complexity:

An Introduction to Collateralized
Loan Obligations

Collateralized loan obligations

(CLOs) are robust, opportunity-rich
debt instruments that have been
around for more than 30 years.
And while they’re well established,
they’re also complex enough that
even sophisticated investors may
hesitate to dig into the details –
and end up avoiding them instead.
 CLOs have been gaining wider prominence in markets in
AUTHORS:
recent years, and it’s no surprise why. They have historically
offered a compelling combination of above-average yield and
Laila Kollmorgen, CFA
Portfolio Manager, potential appreciation. But for many investors, the basics of
CLO Tranche, how they work, the benefits they can provide, and the risks they
Houston
pose are wrapped in complication, which is why they’re also
often misconstrued by the financial media and some market
participants.
Steven Oh, CFA
Global Head of Credit and Fixed
Income, Co-Head of Leveraged In spite of this, we believe CLOs are attractive investments and
Finance, well worth the time and effort required to understand them.
Los Angeles

What is a CLO?
Put simply, a CLO is a portfolio of predominantly leveraged loans that is
securitized and managed as a fund. The assets are typically senior secured
loans, which benefit from priority of payment over other claimants in the
event of an insolvency. Each CLO is structured as a series of tranches that
are interest-paying bonds, along with a small portion of equity.

CLOs originated in the late 1980s, similar to other types of securitizations,

as a way for banks to package leveraged loans together to provide investors
with an investment vehicle with varied degrees of risk and return to best
suit their investment objectives. The first vintage of “modern” CLOs – which
focused on generating income via cash flows – was issued starting in the
mid- to late-1990s. Commonly known as “CLO 1.0,” this vintage included
some high yield bonds, as well as loans, and were the standard CLO
structure until the financial crisis struck in 2008.

The next vintage, CLO 2.0, began in 2010 and changed in response to the
financial crisis by strengthening credit support and shortening the period in
which loan interest and proceeds could be reinvested into additional loans.

The current vintage, CLO 3.0, began in 2014 and aimed to further reduce risk
by eliminating high yield bonds and adhering to the Volcker Rule and other
new regulations. In 2020, the Volcker Rule was further amended, and high
yield bonds are now allowed back into CLOs. Currently, few CLOs allow for
investments into high yield, and those that do generally limit the exposure
to 5%-10%. To compensate for the exposure to high yield, these CLOs have
increased levels of subordination to better protect debt tranches. Vintages
2.0 and 3.0 represent the biggest chunk of the market, with about $800
billion in principal outstanding, while less than 1% of the market remains in
CLO 1.0 vintages.1

1
Source: Bank of America Global Research as of 31 July 2021.

2 | PineBridge Investments
The vast majority of CLOs are called “arbitrage CLOs” because they aim to capture the excess spread between
the portfolio of leveraged bank loans (assets) and the classes of CLO debt (liabilities), with the equity investors
receiving any excess cash flows after the debt investors are paid in full. The market for arbitrage CLOs is
valued at $959 billion globally, with about 83% issued in the US and 17% in Europe.2

CLOs Get Better With Age

US CLO vintages 2.0 and 3.0 represent the biggest share of the market today

800
700
Estimated outstanding ($bn)

600
500
400
300
CLO 2.0/3.0
200
100 CLO 1.0
0
Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2017 Q2 2018 Q2 2019 Q2 2020 Q2 2021

Source: BofA Merrill Lynch Global Research. As of 30 June 2021.

Leveraged loans: more than just collateral

Leveraged loans are more than simply the underlying collateral for CLOs: They’re the fuel that powers CLOs’
attractive income streams and the first of several levels of potential risk mitigation built into the CLO structure.

Standard & Poor’s defines leveraged loans as senior secured bank loans rated BB+ or lower (i.e., below
investment grade) or yielding at least 125 basis points above a benchmark interest rate (typically Libor 3 or
SOFR in the US and Euribor in Europe) and secured by a first or second lien.4 Several characteristics make
leveraged loans particularly suitable for securitizations. They:

• Pay interest on a consistent monthly or quarterly basis;

• Trade in a highly liquid secondary market;
• Have a historically high recovery rate in the event of default; and
• Originate from a large, diversified group of issuers.

As of 30 June 2021, the amount of leveraged bank loans outstanding was $1.26 trillion in the US and €252
billion in Europe.5

2
 ource: Bank of America Global Research as of 31 July 2021.
S
3
Libor references should be considered illustrative, as this rate is effectively ceasing by the end of 2021. Please review “Risks
Related to the Discontinuance of the London Interbank Offered Rate (“Libor”)” found at the end of this presentation for more
information regarding this transition.
4
Source: S&P Global Market Intelligence, Leveraged Commentary & Data (LCD): Leveraged Loan Primer, as of 30 September
2021.
5
Source: Morgan Stanley research, “Global CLOs: CLO Tracker July 2021 – Milestone,” and S&P/LCD as of 9 July 2021.

An Introduction to Collateralized Loan Obligations | 3

 Who issues, manages, and owns CLOs?
CLOs are issued and managed by asset managers. Of the approximately 175 CLO
managers6 with post-crisis deals under management worldwide, PineBridge has found
about two-thirds are in the US and the remaining third are in Europe.

Ownership of CLOs varies by tranche. The least risky, senior-most tranches are mainly
owned by insurance companies (which favor income-producing investments) as well
as banks (which need high-quality capital to meet regulatory requirements). The equity
tranche is the riskiest, offers potential upside and a degree of control, and appeals to a
wider universe of investors.

Many Types of Investors Own CLOs

Largest CLO owners by tranche type

Tranche Investor Type

• Banks • Insurance companies

Senior tranches
• Institutional asset • Pension funds and
(Rated AAA and AA)
managers endowments

• Insurance companies
• Pension funds and
• Institutional asset
Mezzanine tranches endowments
managers
(Rated A/BBB/BB) • Structured credit funds
• Banks
• Permanent-capital vehicles*
• Hedge funds

• Pension funds and

• CLO managers
endowments
• Institutional asset
• Banks
managers
Equity tranche • Sovereign wealth funds/
• Structured credit funds
family offices
• Insurance companies
• Private equity funds
• Hedge funds
• Permanent-capital vehicles*

Source: Morgan Stanley Research, Citi Research, Nomura as of 30 June 2019. *Permanent-capital
vehicles are real estate investment trusts, business development companies, and funds.

6
Source: Intex as of 2 December 2020.

4 | PineBridge Investments
How CLOs work
CLOs are complicated structures that combine 2. Ramp-up (1-6 months): Following the closing
multiple elements with the goal of generating date, the manager purchases the remaining
an above-average return via income and capital collateral to complete the original portfolio.
appreciation. They consist of tranches that hold After the ramp-up is complete, the manager also
the underlying loans, which typically account for performs monthly tests to ensure the portfolio’s
about 90% of total assets, and a sliver of equity. The ability to cover its interest and principal payments.
tranches are ranked highest to lowest in order of
credit quality, asset size, and income stream – and, 3. Reinvestment (1-5 years): Following the ramp-
thus, lowest to highest in order of riskiness. up period, the manager can reinvest all loan
proceeds, either purchasing or selling bank loans
Although leveraged loans themselves are rated to improve the portfolio’s credit quality.
below investment grade, most tranches are rated
investment grade, benefiting from diversification, 4. Non-call (first 0.5 to 2 years of reinvestment):
credit enhancements, and subordination of cash Loan-tranche holders earn a per-tranche yield
flows. spread specified at closing, after which the
majority equity-tranche holder can call or
Each CLO has a defined lifecycle in which collateral refinance the loan tranches.
is purchased, managed, redeemed, and returned to
investors. The standard lifecycle includes five stages: 5. Repayment and deleveraging (1-4 years): As
underlying loans are paid off, the manager pays
1. Warehousing (3-6 months): The manager down the loan tranches in order of seniority and
purchases the initial collateral before the distributes the remaining proceeds to the equity-
closing date. tranche holders.

Tranches Allocate Assets, Income, and Risk

Typical CLO tranche structure

Loan 1
Loan 2
Subordination provides protection
Loan 3 AAA
against portfolio stresses

AA AAA subordination
Cash flows
Losses

A AA subordination

BBB A subordination

BB BBB subordination

Equity/
BB subordination
excess spread
Loan 450

Source: Citibank as of 30 September 2021.

An Introduction to Collateralized Loan Obligations | 5

 All about the cash flows
Cash flows are the lifeblood of a CLO: They determine the distribution of income and principal, which
determines the return on investment. The key concept is that distributions are paid sequentially starting with
the senior-most tranche until each loan tranche has been paid its full distribution. Equity-tranche holders
absorb costs and receive the residual distributions once the costs have been paid.

Coverage tests are a vital mechanism to detect and correct collateral deterioration, which directly affects
the allocation of cash flows. All CLOs have covenants that require the manager to test the portfolio’s ability
to cover its interest and principal payments monthly. Among the many such tests, the most common are the
interest coverage7 and over-collateralization8 tests. Covenants specify baseline values for each test.

If the tests come up short, the manager must take cash flows from the lowest debt and equity-tranche
holders and divert them to retire the loan tranches in order of seniority. The diagram below provides a general
illustration of the “waterfall” process in which cash flows are paid when the portfolio passes and doesn’t pass
its interest coverage tests.

The Cash Flow Waterfall Has Two Streams

Interest payments are based on the results of the coverage test

Interest on the mezzanine securities may be deferred and

Collateral Pool Interest Proceeds compounded into the tranches’ principal balance if cash
flow is not available to pay current interest due. This is
referred to as PIKing (payment in kind).
Trustee and Administrative Fees
If coverage tests are still not
met after partial redemption
Senior Management Fee of mezzanine notes, cash flows
will continue to be used to
redeem mezzanine notes,
If coverage tests are met Interest on Senior Notes If coverage tests are not met and no payment will be given
to the subordinated notes/
equity tranche before
Interest on Mezzanine Securities Redemption of Senior Notes the tests are cured.

Subordinated Management Fee Redemption of Mezzanine Securities If coverage tests are still not
met after senior notes being
fully redeemed
Residual to Subordinated Notes/Equity
If the coverage tests are passing again after partial redemption of senior notes

If the coverage tests are passing again after partial redemption of mezzanine notes

Source: Morgan Stanley Research, “A Primer on Global Collateralized Loan Obligations (CLOs),” as of 20 September 2021.

7
 he income generated by the underlying pool of loans must be greater than the interest due on the outstanding debt in the CLO.
T
8
The principal amount of the underlying pool of loans must be greater than the principal amount of outstanding CLO tranches.

6 | PineBridge Investments
Built-in risk protections
Coverage tests are one of several risk protections built into the CLO structure. Others include:

• Collateral concentration limits. Many deals mandate that at least 90% of the portfolio be invested in
senior secured loans.

• Borrower diversification. The pool of loans typically must be diversified across 150-450 distinct
borrowers in 20-30 industries, with a small percentage of the assets (e.g., 2%) invested in the loans of
any single borrower.

• Borrower size requirements. Deals often restrict managers from purchasing loans to small companies,
whose trading liquidity is low.

The equity tranche: the highest risk could mean the highest
return
The equity tranche occupies a distinct place in the CLO structure. It’s essentially a highly leveraged play on the
strength of the underlying collateral. Because the equity tranche’s success depends on the success of the loan
tranches – it’s last in line to receive cash flows and first to realize loan losses – its owners take the most risk
of any CLO investors. Their goal, then, is to maximize the value of the equity.

As compensation for providing the majority of equity capital, the majority equity-tranche holder is given
potential control over the entire CLO in the form of options, as highlighted below:

• Call option. The majority equity investor can direct a refinancing in some or all CLO debt after the non-call
period expires to take advantage of potentially accretive opportunities for the equity returns, such as:

- Refi scenario. CLO debt is refinanced into lower-cost debt with the same maturity and minimal changes to
other deal terms.

- Reset scenario. All CLO debt is refinanced, and the legal maturity of the debt is extended. Resets typically
extend the reinvestment period of the CLO and the period during which the CLO equity can potentially
capture value under volatile leveraged loan market conditions.

Both options could potentially increase prospective equity returns over the life of the CLO by roughly 50 to 150
bps.

• Redemption occurs when the assets are sold, the proceeds are used to pay off the debt, and the residual
amount is paid to the equity, resulting in a final internal rate of return (IRR) calculation. Redemption allows
the majority equity holder to optimize the value of the underlying collateral by controlling the point in time
that the loan assets are liquidated.

An Introduction to Collateralized Loan Obligations | 7

 Keeping up with regulatory changes
In the wake of securitized investments’ difficulties during the financial crisis, US and European regulators took
steps to mitigate CLOs’ structural risks and make CLOs more attractive for investors.

European regulation is concentrated in several rules governing the capital requirements for banks and
insurance companies. Risk retention, commonly known as “skin in the game,” has been a requirement in
Europe since 2010. It holds that CLO managers must retain 5% of the original value of the assets in their
CLOs to align their interests more closely with those of investors. The US required CLOs to be risk-retention
compliant from December 2016 to May 2018. A court case brought by the LSTA reversed the decision, as it
was deemed that CLO managers do not “originate” the loans; rather, they buy them. As a result, risk retention is
no longer required for US CLO issuers.

A prominent US regulatory development was the implementation of the Volcker Rule, which became effective
in 2014. To be in compliance, most vintage 2.0 CLOs issued starting in 2014 are collateralized only with loans,
and many 1.0 CLOs were “Volckerized” to eliminate non-loan collateral (where previously CLOs had 5%-10%
exposure to bonds). While the Volcker rule has since been amended to allow high yield bonds, few CLOs
include these investments, and exposure is generally limited to 5%-10% and compensated for by increased
levels of subordination.

A wealth of potential benefits …

CLOs can offer investors multiple benefits, both on their own and versus other fixed income sectors.

Strong returns. Over the long term, CLO tranches have performed well relative to other corporate debt
categories, including bank loans, high yield bonds, and investment grade bonds, and significantly
outperformed at lower rating tiers.

US CLO Returns Versus IG Credit, High Yield, and Leveraged Loans

15%
US CLO debt IG credit (AAA-BBB), HY (BB-B) Leveraged loans
12%

9%

6%

3%

0%
AAA AA A BBB BB B

9.5-year annualized returns as of 30 June 2021. Sources: JP Morgan, Bloomberg, and S&P/LCD. US CLO debt represented by
the JP Morgan CLOIE Index; IG credit: Bloomberg US Credit Index; High yield bonds: Bloomberg US Corporate High Yield Bond
Index; Leveraged loans: S&P/LSTA Leveraged Loan Index.

8 | PineBridge Investments
Wider yield spreads. CLO spreads typically are wider than those of other debt instruments, reflecting CLOs’
greater complexity, lower liquidity, and regulatory requirements. Compared with investment grade corporates,
as well as other higher-yielding debt sectors – notably high yield and bank loans – CLO spreads are especially
compelling.

CLO Spreads Are Compelling Versus Other Debt Sectors

CLO spreads versus comparably rated corporate bonds

12%
US CLO IG credit (AAA-BBB), HY (BB-B) Leveraged loans CLO relative value
10%
6.77%
8% 6.24%
5.08%
6% 4.51%

4%
2.12%
1.73%
0.71% 1.26%
2%
0.70%

0%
AAA AA A BBB BB B

Source: JP Morgan, Bloomberg, and S&P/LCD, as of 31 August 2021. US CLO debt represented by the JP Morgan CLOIE Index;
IG credit: Bloomberg US Credit Index; High yield bonds: Bloomberg US Corporate High Yield Bond Index; Leveraged loans:
S&P/LSTA Leveraged Loan Index.

Low interest-rate sensitivity. Leveraged loans and their CLO tranches are floating-rate instruments, priced at
a spread above a benchmark rate (such as Libor,9 Euribor, and SOFR). As interest rates rise or fall, CLO yields
will move accordingly, and their prices have historically moved less than those of fixed-rate instruments. These
characteristics can be advantageous to investors in diversified fixed income portfolios.

9
Libor references should be considered illustrative, as this rate is effectively ceasing by the end of 2021. Please review “Risks
Related to the Discontinuance of the London Interbank Offered Rate (“Libor”)” found at the end of this presentation for more
information regarding this transition.

An Introduction to Collateralized Loan Obligations | 9

 Attractive risk profile. As demonstrated by a variety of key metrics, with impairment rates the most notable
example, CLOs have historically presented lower levels of principal loss when compared with corporate debt
and other securitized products.

Low Cumulative Impairment Rates

CLO impairment and loss rates (1993-2019)

AAA AA A BBB BB B

5.8%
4.9%
4.3% 4.6%
3.9%
2.9%
2.2%
1.2%
0.1%

US CLO US CLO 10-year European CLO European CLO 10-year

impairment rate cumulative loss rate impairment rate cumulative loss rate

“Impairment rate” is the terminology used by Moody’s for CLOs, which is most easily understood as the default rate for
CLOs. A CLO has the ability to “cure” itself, and it is only upon final maturity that a tranche is recognized as “defaulted.”
The “loss rate” is the eventual loss recognized on the tranche at maturity.

As of 22 January 2021. Source: Moody’s, Barclays Research. CLO impairment and loss given default (LGD) rates by original
rating and based on 10-year cumulative data over 1993-2019. Impairments split by principal (outstanding principal write-down
or loss >50bp of the original tranche balance or security carrying Ca or C rating, even if not yet experienced an interest
shortfall or principal write-down) and interest (outstanding interest shortfall >50bp of original tranche balance).

A Competitive Risk/Return Profile

15
CLO B
13
Annualized return (%)

11
CLO BB
9
HY - BB HY - Corporates
7 CLO BBB
Loans - B HY B
5 IG - Corporates CLO A
CLO AA Loans TR
3 Loans - BB
CLO AAA
1
0 3 6 9 12 15 18 21
Annualized volatility (%)

Source: Bloomberg, JP Morgan, S&P LSTA, Barclays. 9.5-year annualized returns and volatility as of 30 June 2021.

10 | PineBridge Investments
Lower default rates. Of the approximately $500 billion of US CLOs issued from 1994-2009 and rated by S&P
(vintage 1.0 CLOs), only 0.88% experienced defaults, and an even smaller percentage of those, 0.35%, were
originally rated BBB or higher (see table below). If we consider those deals rated by Moody’s, there have been
zero defaults on the AAA and AA CLO tranches across all vintages (1.0 through 3.0).10

Even Vintage 1.0 CLOs Experienced Minimal Defaults

Original rating category Original rating count No. of defaults

AAA 1,540 0
AA 616 1
A 790 5
BBB 783 9
BB 565 20
B 28 3
Total 4,322 38

Source: S&P Global Ratings as of 2 August 2018.

Diversification. CLO correlations versus other fixed income categories are relatively low, meaning that many
CLOs have historically increased the effective diversification to a broader portfolio.

CLO Correlations to Other Fixed Income Asset Classes

1.00
0.80
0.80 0.67
0.60 0.54

0.40

0.20 0.11

0.00

-0.20 -0.09
-0.24
-0.40
US Treasury US US IG Securitized High EM
bonds aggregate credit products yield debt

Source: JP Morgan, Bloomberg, 9.5-year correlations as of 30 June 2021. CLOs represented by the JP Morgan CLO Post-Crisis
Index. US Treasury bonds represented by the Bloomberg Long Treasury Index. US aggregate represented by the Bloomberg US
Aggregate Index. US IG credit represented by the Bloomberg US Credit Index. Securitized products represented by the
Bloomberg US Securitized: MBS/ABS/CMBS and Covered TR Index. High yield represented by the Bloomberg US Corporate
High Yield Index. EM debt represented by the JP Morgan EMBI Global Diversified Composite Index.

10
Source: Morgan Stanley Research, “A Primer on Global Collateralized Loan Obligations (CLOs),” as of 20 September 2021.

An Introduction to Collateralized Loan Obligations | 11

 Inflation hedge. CLOs’ floating-rate yields make them an effective hedge against inflation.

Strong credit quality. Unlike most corporate bonds, leveraged loans are both secured and backed by first-lien
collateral.

… and important risks to consider11

The complexity of CLOs comes with a number of risks that investors should consider carefully.

Credit strength. While CLOs enjoy strong credit quality due to the senior secured status of leveraged loans, it’s
important to keep in mind that leveraged loans carry inherent credit risk: They’re issued to below-investment-
grade companies whose revenue streams are sensitive to fluctuations in the economic cycle.

Collateral deterioration. If a CLO’s loans experience losses, cash flows are allocated to tranches in order of
seniority. Depending on the severity of the losses, the value of the equity tranche could be wiped out and junior
loan tranches could lose principal.

Non-recourse and not guaranteed. Leveraged loans are senior obligations and, as such, have full recourse
to the borrower and its assets in the event of default. A CLO, however, has recourse only to the principal and
interest payments of the loans in the portfolio.

Loan prepayments. Leveraged loan borrowers may choose to prepay their loans in pieces or completely.
While experienced CLO managers may anticipate prepayments, they’re nonetheless unpredictable. The size,
timing, and frequency of prepayments could potentially disrupt cash flows and challenge managers’ ability to
maximize portfolio value.

Trading liquidity. CLOs generally enjoy healthy trading liquidity – but that could change very quickly if market
conditions turn. A prime example is the financial crisis, when trading activity for even the most liquid debt
instruments slowed to a trickle.

Timing of issuance. While market conditions could be strong when a CLO is issued, they might not be during
its reinvestment period. That’s what happened to the 2003 vintages, whose reinvestment period coincided
with the onset of the financial crisis and its resulting drop-off in trading volume.

Manager selection. Historical performance of CLO managers encompasses a wide spectrum of returns,
underscoring the importance of choosing seasoned managers with solid long-term track records.

Spread duration. While interest rate duration is low due to the floating-rate nature of CLO tranches (indexed
off three-month Libor,12 Euribor, or SOFR), spread duration is a consideration that should be taken into account.
Due to a typical reinvestment period of four to five years, spread duration is usually between 3.5 and seven
years. The higher up the capital stack, the lower the spread duration, as each CLO is redeemed sequentially,
making the lower-rated tranches longer in spread duration.

11
This should not be considered an exhaustive list of potential risk factors related to CLOs, rather an illustrative description of
some potential factors affecting a CLO investment.
12
Libor references should be considered illustrative as this rate is effectively ceasing by the end of 2021. Please review “Risks
Related to the Discontinuance of the London Interbank Offered Rate (“Libor”)” found at the end of this presentation for more
information regarding this transition.

12 | PineBridge Investments
 Corporate Credit Asset Classes Versus CLO Tranches

High yield bonds and

Senior secured loans Emerging market debt CLO tranches
distressed debt

Corporate bonds Securitization trust

Syndicated loans issued Corporate bonds
issued primarily in Latin (loans issued primarily
primarily by companies issued primarily in the
Issuer America, Europe, Asia, by companies in the US
in the US and Western developed markets
and the Middle East and and Western Europe
Europe (US & Europe)
Africa serve as collateral)

1st, 2nd, 3rd, 4th, 5th, 6th & 7th

Ranking Typically senior secured 1st & 2nd loss 1st loss
loss

Typically Issued with a

Typically issued with a legal maturity of 12-13
Maturity 5-10 years 5-10 years
5- to 9-year maturity years; weighted average
life of 6-10 years

Interest rate
0.25 years 0-6 years 0-6 years 0.25 years
duration

Coupon type Floating rate Fixed rate Fixed rate Floating rate

• Libor + 103 bps (AAA)

• Libor + 151 bps (AA)
• Libor + 187 bps (A)
Spread/OAS Libor + 417 bps 264 bps 249 bps
• Libor + 293 bps (BBB)
• Libor + 620 bps (BB)
• Libor + 905 bps (B)

• 1.72% (AAA)
• 2.59% (AA)
• 3.26% (A)
Yield to worst 4.23% 4.23% 3.63% • 4.48% (BBB)
• 8.23% (BB)
• 11.30% (B)
• 12-16% (Equity)
AAA-B; Not Rated for
Credit rating BB-CCC BB-CCC BBB-B
Equity
Historical
~3% p.a. ~3% p.a. ~2.5%* 0.3%**
default rate
Historical
~75% ~35% ~35% 23%**
recovery rate

Limited call protection. Can be less liquid when

Additional notes Extended trade Higher price volatility Higher price volatility compared to underlying
settlement times (T+7) bank loans (T+2)

As of 30 June 2021. Sources: S&P/LSTA Leveraged Loan Index; Bloomberg Indices; JP Morgan CEMBI Broad Diversified; JP Morgan CLOIE. *1-year
speculative default rate. **10-year geometric mean for all CLO tranches. Sources: Bank of America Merrill Lynch High Yield Strategy Default Rates/
Issues 5 July 2017; Moody’s: Structured Finance: CLOs - Global Impairment and Loss Rates of US and European CLOs: 1993-2017, 25 June 2018. Past
performance is not indicative of future results. There can be no assurance that the target will be achieved.

Note: Libor references above should be considered illustrative as this rate is effectively ceasing by the end of 2021. Please review “Risks Related to the
Discontinuance of the London Interbank Offered Rate (“Libor”)” found at the end of this presentation for more information regarding this transition.

An Introduction to Collateralized Loan Obligations | 13

PineBridge has a long Choosing the right manager
history in CLOs The most critical decision a CLO investor can make is the selection of a
manager. It isn’t easy: There are approximately 175 managers13 with post-
crisis CLOs to choose from, and each creates its own portfolios using its own
PineBridge Investments has investment style. And it’s worth repeating that historical performance among
extensive experience in managers greatly varies. That said, successful managers tend to share several
leveraged finance, not only as a key traits.
manager, but also as an issuer:
Since 1999, we’ve issued 35 Extensive experience
CLOs in the US and Europe, with There’s no substitute for deep CLO management experience, which provides
a par value of $14.2 billion. In the combination of skills, practice, tactical and strategic savvy, adjustment-
addition, we’ve reissued, reset, or making, and chronological perspective needed to generate strong returns in
refinanced 22 transactions worth such a complicated asset class.
$10.2 billion.*
Chronological perspective may be the most important aspect of experience in
Our team of professionals the CLO world, as the benefit of having managed portfolios before, during, and
includes senior leadership that after the financial crisis is incalculable.
has been in place for over 20
years, as well as a deep bench of
credit analysts, most of whom Excellence of execution
have been with us for at least 10 Managers should show strong abilities in the vital competencies that
years. collectively define best-practice portfolio management. These begin with loan
selection, as creating a strong collateral base lays the foundation for potential
In fixed income, our experience success. Trading skill enables the manager to know when to take gains,
extends across the spectrum of avoid losses, and adjust the portfolio as market conditions evolve. Effective
developed and emerging markets,
management of deteriorating credits affects not just the specific credits
investment grade debt, leveraged
involved, but also the entire CLO due to the way cash flows are distributed
finance, and multi-sector
strategies. through the tranche structure. And the reinvestment of principal proceeds in
new collateral can make the difference between good and great performance.
Our investment process is
informed by rigorous, proprietary Expertise in handling risk
credit analysis across sectors Sound risk management is both a cause and effect of these best practices: It
and regions. informs everything the manager does and is reflected in the results. In addition
to oversight of the portfolio, it includes skillful execution of coverage tests; the
Our leveraged finance portfolios
ability to understand the nuances and idiosyncrasies of CLO documentation,
total $22.3 billion, including $5.3
which is nonstandard and complex; and a talent for balancing the numerous
billion in US CLOs, $2.2 billion in
portfolio metrics by optimizing as many as possible while taking a hit on as
European CLOs, and $2.5 billion in
few as possible.
CLO tranches.**

* A s of 31 July 2021. Includes all CLOs

managed by PineBridge (or an affiliate).
** A
 s of 30 June 2021. Includes all
leveraged finance portfolios managed
by PineBridge (or an affiliate). 13
Source: Intex as of 2 December 2020.

14 | PineBridge Investments
Risks Related to the Discontinuance of the London Interbank Offered for investments involving exposure to a currency other than that in which the
Rate (“Libor”) portfolio is denominated, changes in the rate of exchange may cause the
Libor an estimate of the rate at which a sub-set of banks (known as the panel value of investments, and consequently the value of the portfolio, to go up or
banks) could borrow money on an uncollateralized basis from other banks. down. In the case of a higher volatility portfolio, the loss on realization or
The United Kingdom (the “UK”)’s Financial Conduct Authority (the “FCA”), cancellation may be very high (including total loss of investment), as the
which regulates Libor, has announced that it will not compel banks to value of such an investment may fall suddenly and substantially. In making
contribute to Libor after 2021; the panel banks will still be required to submit an investment decision, prospective investors must rely on their own
the USD 1-month, 3-month, 6-month and 12-month Libor settings until 30 examination of the merits and risks involved.
June 2023. As that date approaches the FCA could decide to require the Performance Notes: Past performance is not indicative of future results.
continued publication of these settings on a synthetic basis, which would There can be no assurance that any investment objective will be met.
represent an approximation of each setting, in order to reduce disruption in PineBridge Investments often uses benchmarks for the purpose of
the market. On 3 April 2018, the New York Federal Reserve Bank began comparison of results. Benchmarks are used for illustrative purposes only,
publishing its alternative rate, the Secured Overnight Financing Rate and any such references should not be understood to mean there would
(“SOFR”). The Bank of England followed suit on 23 April 2018 by publishing necessarily be a correlation between investment returns of any investment
its proposed alternative rate, the Sterling Overnight Index Average (“SONIA”). and any benchmark. Any referenced benchmark does not reflect fees and
Each of SOFR and SONIA significantly differ from Libor, both in the actual expenses associated with the active management of an investment.
rate and how it is calculated, and therefore it is unclear whether and when PineBridge Investments may, from time to time, show the efficacy of its
markets will adopt either of these rates as a widely accepted replacement strategies or communicate general industry views via modeling. Such
for Libor. If no widely accepted conventions develop, it is uncertain what methods are intended to show only an expected range of possible investment
effect broadly divergent interest rate calculation methodologies in the outcomes, and should not be viewed as a guide to future performance. There
markets will have on the price and liquidity of loans and debt obligations held is no assurance that any returns can be achieved, that the strategy will be
by the funds, securities issued by the funds and our ability to effectively successful or profitable for any investor, or that any industry views will come to
mitigate interest rate risks. pass. Actual investors may experience different results.
The Alternative Reference Rate Committee confirmed that the 5 March 2021 Information is unaudited unless otherwise indicated, and any information from
announcements by the ICE Benchmark Administration Limited and the FCA third-party sources is believed to be reliable, but PineBridge Investments
on the future cessation and loss of the representativeness of cannot guarantee its accuracy or completeness.
the Libor benchmark rates constitutes a “benchmark transition event” with This document and the information contained herein does not constitute and
respect to all U.S. dollar Libor settings. A “benchmark transition event” may is not intended to constitute an offer of securities or provision of financial
cause, or allow for, certain contracts to replace Libor with an alternative advice and accordingly should not be construed as such. The securities and
reference rate and such replacement could have a material and adverse any other products or services referenced in this document may not be
effect on Libor-linked financial instruments. licensed in all jurisdictions, and unless otherwise indicated, no regulator or
As of the date of this presentation, no specific alternative rates have been government authority has reviewed this document or the merits of the
selected in the market, although the Alternative Reference Rates Committee products and services referenced herein. This document and the information
convened by the Board of Governors of the Federal Reserve System has contained herein has been made available in accordance with the restrictions
made recommendations regarding a specified alternative rate based on a and/or limitations implemented by any applicable laws and regulations. This
priority waterfall of alternative rates and certain bank regulators and the SEC document is directed at and intended for institutional and qualified investors
are encouraging the adoption of such specified alternative rate. (as such term is defined in each jurisdiction in which the security is marketed).
It is uncertain whether or for how long Libor will continue to be viewed as an This document is provided on a confidential basis for informational purposes
acceptable market benchmark, what rate or rates could become accepted only and may not be reproduced in any form. Before acting on any information
alternatives to Libor, or what the effect any such changes could have on the in this document, prospective investors should inform themselves of and
financial markets for Libor-linked financial instruments. Similar statements observe all applicable laws, rules and regulations of any relevant jurisdictions
have been made by regulators with respect to the other Inter-Bank Offered and obtain independent advice if required. This document is for the use of the
Rates (“IBORs”). Certain products / strategies can undertake transactions in named addressee only and should not be given, forwarded or shown to any
instruments that are valued using Libor or other IBOR rates or enter into other person (other than employees, agents or consultants in connection with
contracts which determine payment obligations by reference to Libor or one of the addressee’s consideration thereof).
the other IBORs. Until their discontinuance, the products / strategies could Disclosures by location:
continue to invest in instruments that reference Libor or the other IBORs. In Australia: PineBridge Investments LLC is exempt from the requirement to
advance of 2021, regulators and market participants are working hold an Australian financial services license under the Corporations Act
to develop successor rates and transition mechanisms to amend existing 2001 (Cth) in respect of the financial services it provides to wholesale
instruments and contracts to replace an IBOR with a new rate. Nonetheless, clients, and is not licensed to provide financial services to individual
the termination of Libor and the other IBORs presents risks to product / investors or retail clients. Nothing herein constitutes an offer or solicitation
strategies investing in Libor-linked financial instruments. It is not possible to anyone in or outside Australia where such offer or solicitation is not
at this point to identify those risks exhaustively, but they include the risk authorised or to whom it is unlawful. This information is not directed to any
that an acceptable transition mechanism might not be found or might not person to whom its publication or availability is restricted.
be suitable for those products / strategies (as applicable). In addition, Brazil: PineBridge Investments is not accredited with the Brazilian Securities
any alternative reference rate and any pricing adjustments required in Commission - CVM to perform investment management services. The investment
connection with the transition from Libor or another IBOR could impose costs management services may not be publicly offered or sold to the public in Brazil.
on, or might not be suitable for applicable products / strategies, resulting in Documents relating to the investment management services as well as the
costs incurred to close out positions and enter into replacement trades. information contained therein may not be supplied to the public in Brazil.
Disclosure Statement Chile: PineBridge Investments is not registered or licensed in Chile to provide
PineBridge Investments is a group of international companies that provides managed account services and is not subject to the supervision of the
investment advice and markets asset management products and services to Comisión para el Mercado Financiero of Chile (“CMF”). The managed
clients around the world. PineBridge Investments is a registered trademark account services may not be publicly offered or sold in Chile.
proprietary to PineBridge Investments IP Holding Company Limited. Colombia: This document does not have the purpose or the effect of
Readership: This document is intended solely for the addressee(s) and may initiating, directly or indirectly, the purchase of a product or the rendering of
not be redistributed without the prior permission of PineBridge Investments. a service by PineBridge Investments (“investment adviser”) to Colombian
Its content may be confidential, proprietary, and/or trade secret information. residents. The investment adviser’s products and/or services may not be
PineBridge Investments and its subsidiaries are not responsible for any promoted or marketed in Colombia or to Colombian residents unless such
unlawful distribution of this document to any third parties, in whole or in part. promotion and marketing is made in compliance with decree 2555 of 2010
Opinions: Any opinions expressed in this document represent the views of and other applicable rules and regulations related to the promotion of foreign
the manager, are valid only as of the date indicated, and are subject to financial and/or securities related products or services in Colombia. The
change without notice. There can be no guarantee that any of the opinions investment adviser has not received authorisation of licensing from The
expressed in this document or any underlying position will be maintained at Financial Superintendency of Colombia or any other governmental authority
the time of this presentation or thereafter. We are not soliciting or in Colombia to market or sell its financial products or services in Colombia.
recommending any action based on this material. By receiving this document, each recipient resident in Colombia
Risk Warning: All investments involve risk, including possible loss of acknowledges and agrees that such recipient has contacted the investment
principal. If applicable, the offering document should be read for further adviser at its own initiative and not as a result of any promotion or publicity
details including the risk factors. Our investment management services by the investment adviser or any of its representatives. Colombian residents
relate to a variety of investments, each of which can fluctuate in value. The acknowledge and represent that (1) the receipt of this presentation does not
investment risks vary between different types of instruments. For example, constitute a solicitation from the investment adviser for its financial
 About PineBridge Investments is a private, global asset manager focused on active, high-conviction investing.
PineBridge We draw on the collective power of our experts in each discipline, market, and region of the world through
an open culture of collaboration designed to identify the best ideas. Our mission is to exceed clients’
Investments expectations on every level, every day. As of 30 September 2021, the firm managed US$141.8 billion
across global asset classes for sophisticated investors around the world.
pinebridge.com
MULTI-ASSET | FIXED INCOME | EQUITIES | ALTERNATIVES

Disclosure Statement (Cont’d)

products and/or services, and (2) they are not receiving from the investment (Superintendencia del Mercado de Valores, or the “SMV”) or the Lima Stock
adviser any direct or indirect promotion or marketing of financial products Exchange (Bolsa de Valores de Lima). Accordingly, the Interests may not be
and/or services. Marketing and offering of products and/or services of a offered or sold in Peru except, among others, if such offering is considered a
foreign financial [or securities related] entity represented in Colombia. private offer under the securities laws and regulations of Peru. The Interests
Promoción y oferta de los negocios y servicios de la entidad del mercado de cannot be offered or sold in Peru or in any other jurisdiction except in
valores del exterior [o financiera, según sea el caso] representada en Colombia. compliance with the securities laws thereof. In making an investment decision,
Dubai: PineBridge Investments Europe Limited is regulated by the Dubai institutional investors (as defined by Peruvian law) must rely on their own
Financial Services Authority as a Representative Office and is making this examination of the terms of the offering of the Interests to determine their
document available to you. This document is intended for sophisticated/ ability to invest in the Interests. All content in this document is for information
professional investors only and no other Person should act upon it. or general use only. The information contained in this document is referential
Germany: This material is issued by PineBridge Investments Deutschland and may not be construed as an offer, invitation or recommendation, nor
GmbH, licensed and regulated by the Bundesanstalt für should be taken as a basis to take (or stop taking) any decision. This document
Finanzdienstleistungsaufsicht (BaFin). has been prepared on the basis of public information that is subject to change.
This information may not be construed as services provided by PineBridge
Hong Kong: The issuer of this document is PineBridge Investments Asia Investments within Peru without having the corresponding banking or similar
Limited, a company incorporated in Bermuda with limited liability, licensed license according to the applicable regulation.
and regulated by the Securities and Futures Commission (SFC). This
document has not been reviewed by the SFC. Singapore: PineBridge Investments Singapore Limited is licensed and
regulated by the Monetary Authority of Singapore (MAS). In Singapore, this
Ireland: When this document is issued in the EEA, unless stated otherwise, it material may not be suitable to a retail investor. This advertisement or
is approved and issued by PineBridge Investments Ireland Limited, licensed publication has not been reviewed by the MAS.
and regulated by the Central Bank of Ireland.
Sweden: PineBridge Investments Ireland Limited Sweden filial is licensed and
Israel: PineBridge Investments is neither licensed nor insured under the regulated by Finansinspektionen. This is a branch office of PineBridge Investments
Israeli Investment Advice Law. Ireland Limited, licensed and regulated by the Central Bank of Ireland.
Japan: This document is not, and under no circumstances is to be Switzerland: This material is issued by PineBridge Investments Switzerland
considered as, a public offering of securities in Japan. No registration GmbH and classes this communication as a financial promotion which is
pursuant to Article 4 paragraph 1 of Japan’s Financial Instruments and intended for Institutional and Professional clients as defined by the Swiss
Exchange Act (“FIEA”) has been or will be made with respect to any Federal Financial Services Act (“FinSA”) and its implementing ordinance, the
solicitation of applications for acquisition of interests of any vehicle or any Federal Financial Services Ordinance (“FinSO”). PineBridge Investments
account that may be undertaken, on the grounds that any such solicitation Switzerland GmbH is affiliated with the Swiss Chambers’ Arbitration
would constitute a “solicitation for qualified institutional investors” as set Institution (SCAI), 4, boulevard du Théâtre, P.O. Box 5039, 1211 Geneva 11,
forth in Article 23-13, paragraph 1 of the FIEA. In Japan, this document is Switzerland, Tel: +41 (0)22 819 91 57.
directed at and intended for qualified institutional investors (as such term is
defined in Article 2, paragraph 3, item 1 of the FIEA; “QIIs”). If any offering is Taiwan: PineBridge Investments Management Taiwan Ltd. Is licensed and
to be made, that would be made on the condition that each investor enters regulated by Securities and Futures Bureau of Taiwan (SFB). In Taiwan, this material
into an agreement whereby the investor covenants not to transfer its may not be suitable to investors and is not reviewed or endorsed by the SFB.
interests (i) to persons other than QIIs, or (ii) without entering into an United Kingdom: This material is issued by PineBridge Investments Europe
agreement whereby the transferee covenants not to transfer its interests to Limited, licensed and regulated by the Financial Conduct Authority. In the UK
persons other than QIIs. this communication is a financial promotion solely intended for professional
Kuwait: The offering of any security in any vehicle has not been approved or clients as defined in the FCA Handbook and has been approved by
licensed by the Kuwait Capital Markets Authority or any other relevant PineBridge Investments Europe Limited. Should you like to request a
licensing authorities in the State of Kuwait, and accordingly does not different classification, please contact your PineBridge representative.
constitute a public offer in the State of Kuwait in accordance with Law no. 7 In the UK, this material may also be issued by PineBridge Benson Elliot LLP,
for 2010 regarding the Establishment of the Capital Markets Authority and registered in England (company number OC317119) with its registered
the Regulating Securities Activities (“CMA Law”). This document is strictly address at 50 Hans Crescent, London, SW1X 0NA. PineBridge Benson Elliot
private and confidential and is being issued to a limited number of LLP is authorised and regulated by the Financial Conduct Authority.
professional investors: A) who meet the criteria of a Professional Client by Uruguay: The sale of the securities qualifies as a private placement pursuant
Nature as defined in Article 2-6 of Module 8 of the Executive Regulations No. to section 2 of Uruguayan law 18.627. The issuer represents and agrees that
72 of 2015 of the CMA Law; B) upon their request and confirmation that they it has not offered or sold, and will not offer or sell, any securities to the public
understand that the securities have not been approved or licensed by or in Uruguay, except in circumstances which do not constitute a public
registered with the Kuwait Capital Markets Authority or any other relevant offering or distribution under Uruguayan laws and regulations. The securities
licensing authorities or governmental agencies in the State of Kuwait; and are not and will not be registered with the Central Bank of Uruguay to be
must not be provided to any person other than the original recipient, and may publicly offered in Uruguay. The securities correspond to investment funds
not be reproduced or used for any other purposes whatsoever. that are not investment funds regulated by Uruguayan law 16,774 dated 27
Malaysia: PineBridge Investments Malaysia Sdn Bhd is licensed and September 1996, as amended.
regulated by Securities Commission of Malaysia (SC).  This material is not Where applicable, the Manager may determine to terminate any
reviewed or endorsed by the SC. arrangements made for marketing the Shares in one or more jurisdictions in
Netherlands: PineBridge Investment Ireland Limited, Netherlands Branch is accordance with the AIFM Directive and UCITS Directive respectively, as
licensed and regulated by The Dutch Authority for the Financial Markets may be amended from time to time.
(AFM). This is a branch office of PineBridge Investments Ireland Limited, Investors and potential investors can obtain a summary of investor
licensed and regulated by the Central Bank of Ireland. rights and information on access to collective redress mechanisms at
Peru: Specifically, the Interests will not be subject to a public offering in Peru. www.pinebridge.com/investorrights.
The Interests described herein have not been and will not be approved by or Last updated 28 October 2021.
registered with the Peruvian Superintendency of Capital Markets