While it's always been along for the ride, high yield collateral was all but relegated to the back seat as CDO investors experienced a bumpy ride, thanks to record downgrades over the last 18 months. Although most investors are aware that loan deals have performed better than bond deals, analysts are now comparing loan performance to investment grade-backed CDOs, a finding that says CLOs have found paradise by the dashboard light.

CDOs packed with high yield bonds (HYB) comprised the large majority of the downgrades witnessed last year. Yet investors shied away from the high yield collateral class in general. In the meantime, high yield loans (HYL) have turned in a consistently upbeat performance. Over the last six years, research from UBS Warburg found that HYL CDOs have outperformed not just HYB-backed CDOs, but have solidly outperformed corporate debt-backed CDOs.

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