An unusual way of attracting investors in the riskiest slices of collateralized loan obligations is coming under scrutiny.

CLOs pool payments from multiple below-investment grade corporate loans and pass them on to different classes of owners in various tranches of securities. The most subordinate class, known as the equity, is typically the hardest to place, because it receives no interest and is unrated, putting it off-limits to certain kinds of investors. So some CLO managers combine the equity with a more senior tranche, creating a new security with characteristics of both classes: it receives interest and is has  certain rights, such as the right to terminate a manager for cause and the right to consent to amendments and other actions of the CLO and the manager.

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