Securitization without Adverse Selection: The Case of CLOs
Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)
Washington University in Saint Louis - John M. Olin Business School
Harvard University; National Bureau of Economic Research (NBER)
September 6, 2011
AFA 2010 Atlanta Meetings Paper
In this paper, we investigate whether securitization was associated with risky lending in the corporate loan market by examining the performance of individual loans held by CLOs. We employ two different datasets that identify loan holdings for a large set of CLOs and find that adverse selection problems in corporate loan securitizations are less severe than commonly believed. Using a battery of performance tests, we find that loans securitized before 2005 performed no worse than comparable unsecuritized loans originated by the same bank. Even loans originated by the bank that acts as the CLO underwriter do not show underperformance relative to the rest of the CLO portfolio. While there is some evidence of underperformance for securitized loans originated between 2005 and 2007, it is not consistent across samples, performance measures, and horizons. Overall, we argue that the securitization of corporate loans is fundamentally different from securitization of other assets classes because securitized loans are fractions of syndicated loans. Therefore, mechanisms used to align incentives in a lending syndicate are likely to reduce adverse selection in the choice of CLO collateral.
Number of Pages in PDF File: 58
Keywords: Structured finance, Collateralized loan obligations (CLOs), CDOs, Syndicated loans
JEL Classification: G20, G21, G23, D82
Date posted: February 16, 2009 ; Last revised: April 16, 2013
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