Securitization without Adverse Selection: The Case of CLOs

58 Pages Posted: 16 Feb 2009 Last revised: 15 Feb 2018

See all articles by Efraim Benmelech

Efraim Benmelech

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Jennifer Dlugosz

Board of Governors of the Federal Reserve System

Victoria Ivashina

Harvard University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 6, 2011

Abstract

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.

Keywords: Structured finance, Collateralized loan obligations (CLOs), CDOs, Syndicated loans

JEL Classification: G20, G21, G23, D82

Suggested Citation

Benmelech, Efraim and Dlugosz, Jennifer and Ivashina, Victoria, Securitization without Adverse Selection: The Case of CLOs (September 6, 2011). AFA 2010 Atlanta Meetings Paper, Journal of Financial Economics (JFE), Vol. 106 (1), 91-113, 2012, Available at SSRN: https://ssrn.com/abstract=1344068 or http://dx.doi.org/10.2139/ssrn.1344068

Efraim Benmelech

Northwestern University - Kellogg School of Management ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jennifer Dlugosz

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Victoria Ivashina (Contact Author)

Harvard University ( email )

Harvard Business School
Baker Library 233
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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