Securitization Without Adverse Selection: The Case of Clos

46 Pages Posted: 7 Feb 2011 Last revised: 9 Feb 2011

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: February 2011

Abstract

For nearly a decade prior to the collapse of structured finance markets in late 2007, securitization by collateralized loan obligations (CLOs) was a key source of capital for the high-yield corporate loan market. 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. Controlling for borrowers' credit quality, securitized loans perform no worse, and under some criteria even better, than unsecuritized loans of comparable credit quality. However, within a CLO portfolio, loans originated by the bank that acts as the CLO underwriter underperform the rest of the loan portfolio. 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 also reduce adverse selection in the choice of CLO collateral.

Suggested Citation

Benmelech, Efraim and Dlugosz, Jennifer and Ivashina, Victoria, Securitization Without Adverse Selection: The Case of Clos (February 2011). NBER Working Paper No. w16766, Available at SSRN: https://ssrn.com/abstract=1754917

Efraim Benmelech (Contact Author)

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

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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