The strategic advantage of AAA-rated CLO Notes

Title: The strategic advantage of AAA-rated CLO Notes

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This marketing communication is exclusively for use by Professional Investors and Qualified Clients/Sophisticated Investors in Continental Europe (as specified in the important information), for Qualified Clients/Sophisticated Investors in Israel, for Professional Clients in Dubai, Ireland and the UK, for Sophisticated or Professional Investors in Australia, for Institutional Investors in the United States, for Institutional Investors in Singapore, for Professional Investors in Hong Kong and for Wholesale Investors (as defined in the Financial Markets Conduct Act) in New Zealand. In Canada, this communication is intended only for investors who are (i) Accredited Investors, and (ii) Permitted Clients, as defined under National Instrument 45-106 and National Instrument 31-103, respectively. It is not intended for and should not be distributed to, or relied upon by, the public or retail investors. Please do not redistribute this document.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

CLO Debt Securities Risk: Highly rated tranches of CLO Debt Securities may be downgraded, and in stressed market environments even highly rated tranches of CLO Debt Securities may experience losses due to defaults in the underlying loan collateral, the disappearance of the subordinated/equity tranches, market anticipation of defaults, as well as negative market sentiment with respect to CLO securities as an asset class.

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Kevin Petrovcik:

My name is Kevin Petrovcik and I'm a client portfolio manager and part of Invesco's $48 billion private credit platform. I am super excited to spend some time with you today to discuss some new developments that will now allow easier access to AAA-rated CLO note investments. This is one of the highest yielding investment grade assets and they are AAA. My goal today is to provide you with the following, one, an introduction to CLO notes and a better understanding of how they can be accretive to client's portfolios. And two, a background on Invesco's expertise in CLO note investment and what sets Invesco Private Credit apart from some of our competitors. So let's get started.

Before discussing what a CLO note is, let's spend some time getting to know CLOs. A collateralized loan obligation or CLO is a securitization of a managed portfolio of senior secured leverage loans.

These are the same underlying assets that we've been managing at Invesco Private Credit for the past 35 years.

Corporate issuers will fund regular operations as well as capital market events with these underlying loans. Normal capital market events include things such as mergers, acquisitions, or leveraged buyouts by private equity sponsors. The underlying loans are not securities, but they are rated and typically below investment grade. The loans are floating rate and have a fixed spread over that floating base rate Euribor in Europe or SOFR in the US. While underlying loans are not securities, they're private debt instruments. Investors in loans get the benefit of being senior, secured, and first in line of repayment if anything should go wrong with the issuer.

Now, the CLO structure itself issues securities in the forms of notes and will go out to rating agencies, most likely Moody's, Standard & Poor's, or Fitch to get these notes rated.

Just like any other rated instrument, that rating reflects the likelihood of full repayment of all principal and interest. Each rated note has a different risk profile based on the priority claim of the cash flow of the underlying CLO.

The AAA tranches have priority payment and therefore the lowest risk profile with the strongest structural protection. From a rating agency standpoint, a AAA-rated CLO note has the same default risk as a AAA-rated sovereign or corporate bond. CLOs in their current form have been around for nearly 30 years. One of the key advantages of CLO notes is its high quality floating rate income stream with the highest spreads over traditional AAA assets.

This higher spread and yield has historically resulted in AAA CLO notes outperforming comparable asset classes, but with less volatility. This combination of higher income, lower volatility, and low correlation to traditional asset classes helps diversify an investor's portfolio.

CLOs have various asset coverage and collateral tests that automatically self-correct in periods of stress. To be fair, CLOs are part of a less liquid asset class that can have a higher degree of price volatility during periods of risk-off sentiment. However, the AAA notes offer the highest priority payment on all the underlying corporate credit exposure, which in itself is senior and secured. In fact, over the past 25 years, AAA-rated CLO notes have never defaulted. CLO notes have proven very resilient, and were one of the best performing asset classes throughout the market downturn in 2022, providing diversification from traditional asset classes and outperforming investment-grade bonds by over 16%. Now with a general understanding of CLO notes, let's focus on what differentiates Invesco's approach to managing CLO notes. Invesco leverages the private credit team's 35 years of experience in private credit markets.

Our team has been making investments in rated CLO notes for institutional portfolios for over 25 years.

First, as one of the largest loan managers with over $48 billion in private credit, we are positioned to understand the underlying collateral. Because our CLO note investment team sits alongside our senior loan team, we can incorporate both our knowledge of CLO managers along with our proprietary view of the underlying collateral in order to screen out the lower quality segment of the market. The largest subsector of Invesco's Private Credit platform is managing over $16 billion in underlying CLOs. This place is Invesco as one of the top CLO managers in Europe and the US. Our CLO portfolio managers are the same investors who are making investment decisions on which note to invest in. Not only do we understand what nuances and features to look for when investing in CLOs, Invesco has a well-established relationship with all of the underwriters in order to get good allocations on attractive new issue and secondary opportunities.

Lastly, Invesco has been investing in CLO notes for the past 25 years. We manage almost $2 billion of CLO notes for institutional investors globally, including separate institutional accounts that span over the last 15 years.

In summary, AAA-rated CLO notes represent an overall attractive addition to many portfolios. Relatively high income levels coupled with their low duration create an insensitivity to interest rate changes on their price, structural advantages, and overall low correlation, which really allows them to potentially act as a component of a much larger fixed income portfolio. Invesco's time-tested investment process can work through all the nuances of the asset class and overall work to target high levels of risk-adjusted return. Leaving this potential opportunity in investors' hands. For more information about investing, please contact your local Invesco representative.

Footnotes

AAA CLO notes have historically outperformed comparable asset classes resulting from its high-quality floating rate income stream with higher spreads over traditional AAA assets, but with less volatility. This data is reference from: Yield represented by Yield to Worst (YTW). US CLO AAA Notes represented by J.P. Morgan CLOIE AAA Index, AAA US Corporates by Bloomberg U.S. Aaa Corporate Index, AAA US ABS by Bloomberg US Agg. ABS AAA Index, Bloomberg US Aggregate Bond Index by US Agg, 1-3 Yr Treasuries by U.S. Treasury: 1-3 Year Index and 1-3 year U.S. Corp by component of the US Agg index. Euro CLO AAA Notes represented by represented by J.P. Morgan Euro CLOIE Index. Euro Agg 1-3yr by Euro-Aggregate: 1-3 Year Index. Euro Securitized AAA by Bloomberg Euro-Aggregate: Securitized  - AAA Index. Euro Agg by Bloomberg Euro-Aggregate Index. Euro Corp IG by Bloomberg Euro-Aggregate: Corporate Index. Euro Corp AAA by Bloomberg Euro-Aggregate Corporate Aaa Index and Euro Agg Treasury by Euro-Aggregate: Treasury Index. All Euro indices are hedged to Euro. An investment cannot be made directly in an index. Past performance does not predict future returns. All data as of December 31, 2024.

Source: 2022 CLO AAA outperformance references the JP Morgan CLOIE AAA Index versus the performance of the Bloomberg U.S. Corporate Investment Grade Index for the full year 2022.

All data as of December 31, 2024 Invesco Senior Secured Management, Inc. unless otherwise noted.

About risk

For complete information on risks, refer to the legal documents.

Value fluctuation: The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested.

Credit risk: The creditworthiness of the debt the Fund is exposed to may weaken and result in fluctuations in the value of the Fund. There is no guarantee the issuers of debt will repay the interest and capital on the redemption date. The risk is higher when the Fund is exposed to high yield debt securities.

Interest rates: Changes in interest rates will result in fluctuations in the value of the fund.

Liquidity risk: It may be difficult for the Fund to buy or sell certain instruments in stressed market conditions. Consequently, the price obtained when selling such instruments may be lower than under normal market conditions.

Many senior loans are illiquid, meaning that the investors may not be able to sell them quickly at a fair price and/or that the redemptions may be delayed due to illiquidity of the senior loans. The market for illiquid securities is more volatile than the market for liquid securities. The market for senior loans could be disrupted in the event of an economic downturn or a substantial increase or decrease in interest rates. Senior loans, like most other debt obligations, are subject to the risk of default. The market for senior loans remains less developed in Europe than in the U.S.

Alternative investment products, including private equity, may involve a higher degree of risk, may engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, may not be required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual portfolios, often charge higher fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. There is often no secondary market for private equity interests, and none is expected to develop. There may be restrictions on transferring interests in such investments.

Important information

This marketing communication is exclusively for use by Professional Investors in Continental Europe as defined below, for Qualified Clients/Sophisticated Investors in Israel, for Professional Clients in Dubai, Ireland and the UK, for Sophisticated or Professional Investors in Australia, for Institutional Investors in the United States, for Institutional Investors in Singapore, for Professional Investors in Hong Kong and for Wholesale Investors (as defined in the Financial Markets Conduct Act) in New Zealand. In Canada, this communication is intended only for investors who are (i)  Accredited Investors, and (ii) Permitted Clients, as defined under National Instrument 45-106 and National Instrument 31-103, respectively. It is not intended for and should not be distributed to, or relied upon by, the public or retail investors. Investors should read the legal documents prior to investing. Please do not redistribute this document.  

For the distribution of this communication, Continental Europe is defined as Austria, Belgium, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Italy, Luxembourg, Netherlands, Norway, Slovakia, Spain, Sweden and Switzerland. 

Data as at 31 December 2024, unless otherwise stated. By accepting this material, you consent to communicate with us in English, unless you inform us otherwise. Views and opinions are based on current market conditions and are subject to change.  

This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. 

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This should not be relied upon as the sole factor in an investment making decision. As with all investments there are associated inherent risks.  Investors should consult a financial professional before making any investment decisions if they are uncertain whether an investment is suitable for them. Please obtain and review all financial material carefully before investing.  

Further information on our products is available using the contact details shown. 

Australia 

This document has been prepared only for those persons to whom Invesco has provided it. It should not be relied upon by anyone else. Information contained in this document may not have been prepared or tailored for an Australian audience and does not constitute an offer of a financial product in Australia. You may only reproduce, circulate and use this document (or any part of it) with the consent of Invesco. 

The information in this document has been prepared without taking into account any investor’s investment objectives, financial situation or particular needs.  Before acting on the information the investor should consider its appropriateness having regard to their investment objectives, financial situation and needs. 

You should note that this information: 

• may contain references to dollar amounts which are not Australian dollars; 

• may contain financial information which is not prepared in accordance with Australian law or practices; may not address risks associated with investment in foreign currency denominated investments; and does not address Australian tax issues. 

Hong Kong  

This document is distributed, circulated or issued to professional investors (as defined in the Hong Kong Securities and Futures Ordinance (the “SFO”) and any rules made under the SFO or as otherwise permitted by the SFO only in Hong Kong.  

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This document is provided to Institutional Investors only in Singapore. It may not be circulated or distributed, whether directly or indirectly, to persons in Singapore other than to an institutional investor under Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”) or otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. 

New Zealand 

This document is issued only to wholesale investors (as defined in the Financial Markets Conduct Act) in New Zealand to whom disclosure is not required under Part 3 of the Financial Markets Conduct Act. This document has been prepared only for those persons to whom it has been provided by Invesco. It should not be relied upon by anyone else and must not be distributed to members of the public in New Zealand. Information contained in this document may not have been prepared or tailored for a New Zealand audience. You may only reproduce, circulate and use this document (or any part of it) with the consent of Invesco. This document does not constitute and should not be construed as an offer of, invitation or proposal to make an offer for, recommendation to apply for, an opinion or guidance on Interests to members of the public in New Zealand. Applications or any requests for information from persons who are members of the public in New Zealand will not be accepted.  

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This information is being delivered to the types of investors listed on the cover in order to assist them in determining whether they have an interest in the type of strategy described herein. It has been prepared solely for information purposes. The distribution and offering of the strategy in certain jurisdictions may be restricted by law. Persons into whose possession this document may come are required to inform themselves about and to comply with any relevant restrictions.  

This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation. 

This document is issued 

• in Australia by Invesco Australia Limited (ABN 48 001 693 232), Level 26, 333 Collins Street, Melbourne, Victoria, 3000, Australia which holds an Australian Financial Services Licence number 239916. 

• in Canada by Invesco Canada Ltd., 16 York Street, Suite 1200, Toronto, Ontario M5J 0E6. 

• in Continental Europe by: Invesco Management S.A., President Building, 37A Avenue JF Kennedy, L - 1855 Luxembourg, regulated by the Commission de Surveillance du Secteur Financier, Luxembourg. 

• in Germany and Austria by: Invesco Asset Management Deutschland GmbH, An der Welle 5, 60322 Frankfurt am Main, Germany.  

• in the UK, Ireland and Israel by: Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire, RG9 1HH, United Kingdom. Authorised and regulated by the Financial Conduct Authority. 

• in Dubai by Invesco Asset Management Limited, Index Tower Level 6 - Unit 616, P.O. Box 506599, Al Mustaqbal Street, DIFC, Dubai, United Arab Emirates. Regulated by the Dubai Financial Services Authority. 

• in Hong Kong by Invesco Hong Kong Limited 景順投資管理有限公司, 45/F, Jardine House, 1 Connaught Place, Central, Hong Kong. 

• in New Zealand by Invesco Australia Limited (ABN 48 001 693 232), Level 26, 333 Collins Street, Melbourne, Victoria, 3000, Australia which holds an Australian Financial Services Licence number 239916. 

• in Singapore by Invesco Asset Management Singapore Ltd, 9 Raffles Place, #18-01 Republic Plaza, Singapore 048619. 

• in Switzerland by Invesco Asset Management (Schweiz) AG, Talacker34, 8001 Zurich, Switzerland. 
• in the US by Invesco Senior Secured Management, Inc., 225 Liberty Street, New York, NY 10281.

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE  

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