Issuers of middle-market collateralized loan obligations (CLOs), such as NXT Capital, are reaping the benefits of increased investor confidence in the security class. Performance results demonstrate that instruments that pool the debt of middle-market companies behave similarly to those of large-cap companies. For middle-market CLO issuers, the increased investor comfort translates into paying lower interest rates.
As little as two years ago, institutional investors that considered investing in the AAA tranche of a CLO believed that investing in CLOs made up of middle-market loans was riskier than investing in CLOs made up of large-cap loans because of the lack of transparency surrounding middle-market borrowers. That mindset required the CLO issuer to pay a higher interest rate to investors on the tranche.