CLO Trading and Collateral Manager Bank Affiliation

52 Pages Posted: 11 May 2017

See all articles by Stavros Peristiani

Stavros Peristiani

Federal Reserve Bank of New York--Retired

João A. C. Santos

Federal Reserve Bank of New York

Date Written: May 10, 2017

Abstract

This paper investigates whether the type of institutional affiliation of a collateralized loan obligation (CLO) manager influences the manager’s access to information and risk appetite. We base our investigation on CLO managers’ trading of distressed loans. Our findings reveal that CLO managers affiliated with banks start to sell off their positions in loans arranged by their bank well before the onset of default and continue to do so even after default. In contrast, CLO managers affiliated with nonbanks do not lower their credit exposures to distressed loans. These findings are consistent with bank-affiliated CLO managers having access to private information but also being more concerned to mitigate the reputational risk exposure of their banking organization. On close inspection, we find that reputational concerns are a significant factor in the decision to divest defaulted loans. Although the value of private information after default is moot, we find that bank-affiliated CLO managers are significantly more averse to holding their own arranged problem loans than holding distressed loans arranged by unaffiliated banks. Besides helping us understand CLO managers’ trading activities, our findings also highlight a potential limit to banks’ ability to originate loans and distribute them via their affiliated CLOs.

Keywords: CLOs, trading, distressed loans

JEL Classification: G21, G23, G33

Suggested Citation

Peristiani, Stavros and Santos, João A. C., CLO Trading and Collateral Manager Bank Affiliation (May 10, 2017). Available at SSRN: https://ssrn.com/abstract=2966249 or http://dx.doi.org/10.2139/ssrn.2966249

Stavros Peristiani

Federal Reserve Bank of New York--Retired ( email )

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