CDOs Return, as a Hybrid of Junk Bonds and Leveraged Loans

However, people also point out the higher amount of junk-rated bonds means the assets have lower recovery rates than deals backed mostly by leveraged loans. Moreover, Moody's Investors Service says that up to 17.5% of the assets in these structures can be comprised of Caa-rated assets, whereas a typical CLO has a purchase limit of 7.5%.

And the timing of the proliferation of these assets could be problematic. "As we head towards the end of the credit cycle, is now really the best time to buy this kind of structure? Because in a downturn, these things may take a lot of pain," said Jason Merrill, a structured finance analyst at Penn Mutual Asset Management.

GSO/Blackstone Debt Funds Management LLC sold a $616 million CDO backed by leveraged loans and junk bonds on Nov. 5, the fifteenth since these sales started in 2015. There's been more than $3 billion of the transactions since the beginning of the year.

"Some of these deals have tremendous flexibility to add bonds, like 75% or 100% bonds," Merrill said. "So, as an investor, you could think you're getting a 25% to 50% bond deal but sooner rather than later, the manager could crank that number higher."

— Read Citi Leads CLOs as `Better Mousetrap' Resets Take Off, on ThinkAdvisor.

— Connect with ThinkAdvisor Life/Health on LinkedIn and Twitter.