Working Paper: NBER ID: w29410
Authors: Larry Cordell; Michael R. Roberts; Michael Schwert
Abstract: We study the performance of collateralized loan obligations (CLOs) to understand the market imperfections giving rise to these vehicles and their corresponding economic costs. CLO equity tranches earn positive abnormal returns from the risk-adjusted price differential between leveraged loans and CLO debt tranches. Debt tranches offer higher returns than similarly rated corporate bonds, making them attractive to banks and insurers that face risk-based capital requirements. Temporal variation in equity performance highlights the resilience of CLOs to market volatility due to their closed-end structure, long-term funding, and embedded options to reinvest principal proceeds.
Keywords: No keywords provided
JEL Codes: G12; G14; G23; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CLOs exist due to market imperfections (G19) | CLOs are designed to address inefficiencies in capital markets (G19) |
| CLO equity investment yields a net present value (NPV) of 66 cents per dollar invested (G12) | NPV translates to approximately $33 million or 66% of total assets for a typical deal (G32) |
| CLOs originated before 2010 (N23) | CLOs have higher performance outcomes (D29) |
| CLOs have demonstrated resilience during the COVID-19 crisis (F65) | CLOs are insulated from rollover risk (G33) |
| Performance of CLO equity tranches (G12) | Risk-adjusted price differentials between leveraged loans and debt tranches (G19) |
| CLO equity tranches provide statistically and economically significant abnormal returns (G12) | CLO equity tranches yield a net present value (NPV) of 66 cents per dollar invested (G12) |