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What is a CLO? © 2023 SEI 1 Collateralized loan obligations (CLOs) are actively managed investment products comprised of a diversified pool of leveraged loans that generate cash flow as they are repaid. CLOs allow investors to access the leveraged loan asset class in an efficient and structured way. What are leveraged loans? The leveraged loan asset class has grown tremendously, resulting in increased liquidity and institutional scale over the last two decades. Once considered to be niche, at over $1 trillion 1 today, the asset class is now of a size on par with that of high yield bonds. Put simply, CLOs are entities that purchase hundreds of leveraged loans made to non-investment grade corporate borrowers across diverse industries. Leveraged loans are floating rate loans, which typically produce higher income in higher interest rate environments compared to fixed rate loans or high yield bonds. They are typically the most senior security in a corporate borrower's capital structure and therefore are entitled to be paid back before any high yield bonds or common equity of the company in the event of a bankruptcy or default. These loans are usually rated by the ratings agencies and secured by the company's assets (inventory, real estate, property, and equipment) and have historically had higher recovery rates compared to unsecured loans and high yield bonds. As borrowers pay the interest (and eventually, the original borrowed amount) on their loans, these cash flows go to the CLOs who own the loans and are then redistributed by the CLO to its investors according to a specific schedule of payments, pre- determined by the structure of the CLO. Features of CLOs CLOs bundle corporate leveraged loans into structures that are divided into tranches (slices) or layers of risk and sold to investors depending on their differing risk-return objectives. The unique features of the structure are summarized below: • Tranche: French for "slice," a CLO is comprised of several tranches of risk. In a typical CLO, roughly 75% to 90% of the structure is created to be floating rate senior and mezzanine debt tranches, with the remainder consisting of the equity tranche. CLO debt tranches are typically rated investment grade (most likely to be repaid) at the most senior level down to below investment grade (less likely to be repaid) by ratings agencies. The equity tranche will experience losses first, due to the payment priority structure, if any underlying loans default. - Senior debt tranche: The tranche with the lowest yields, lowest risk of principal loss, and the first to receive cash flows (principal and interest payments) that come to the CLO from the pool of leveraged loans. - Mezzanine debt tranche: This tranche offers higher yields than the senior tranches, but only receives cash flows after the senior tranches have been paid, so has higher risk of loss than the senior tranches. - Equity tranche: The equity tranche is last to receive the cash flows (principal and interest payments from the leveraged loan pool) but is structured such that if all the loans continue to pay their principal and interest, this tranche will have 1 As of September 2023.

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