KBRA Releases Structured Credit Research: KBRA’s Structured Credit 401: Primer on Combination Notes

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Kroll Bond Rating Agency (KBRA) releases a primer for analyzing Combination Notes. The report discusses the benefits of creating these investments from a collateralized loan obligation (CLO) and highlights key risks for investors.

Combination notes, or combo notes, are formed by packaging multiple tranches from a securitization into a single rated note. The most prevalent combo note structure in today’s market includes coupling parts of one or more rated debt tranches with unrated equity. The product’s main purpose is to improve overall capital efficiency, as the inclusion of highly rated debt tranches can typically allow the combo note to achieve an investment-grade rating.

A feature unique to combo notes compared to individually rated tranches is a smoother return profile for various amounts of portfolio losses. By holding various layers of a single transaction, the combo note can achieve higher income from the equity and lower rated tranches, and still have protection in downside scenarios due to the holdings of investment-grade tranches. This blending of notes and equity prevents the combo notes from incurring large losses, while providing an enhanced yield.

KBRA explores the various risk and return trade-offs along with highlighting the types of scenarios that can affect overall performance. In addition, the report describes key risk factors that can arise in the CLO documentation.

Related Publications: (available at www.kbra.com)


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About KBRA and KBRA Europe

KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus, is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.

More news and information about Kroll Bond Rating Agency

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Business Wire: 20:40 GMT Thursday 21st February 2019

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