CLO Performance

53 Pages Posted: 15 Aug 2020 Last revised: 4 Feb 2021

See all articles by Larry Cordell

Larry Cordell

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)

Michael Schwert

University of Pennsylvania - The Wharton School

Date Written: February 4, 2021

Abstract

We study the performance of collateralized loan obligations (CLOs) to understand the market imperfections giving rise to these vehicles and the corresponding costs. CLO equity tranches earn positive abnormal returns from the risk-adjusted price differential between leveraged loans and CLO debt tranches, rather than managerial skill in selecting and trading loans. Debt tranches offer higher returns than similarly rated corporate bonds, making them attractive to regulated intermediaries demanding safe assets. Temporal variation in equity performance and management fees highlights the resilience of CLOs to market volatility due to their long-term funding structure and a reduction in surplus over time as the market has grown.

Keywords: collateralized loan obligations, leveraged loans, securitization

JEL Classification: G23, G11

Suggested Citation

Cordell, Larry and Roberts, Michael R. and Schwert, Michael, CLO Performance (February 4, 2021). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3652124 or http://dx.doi.org/10.2139/ssrn.3652124

Larry Cordell

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) ( email )

3620 Locust Walk, #2320
Philadelphia, PA 19104-6365
United States
(215) 573-9780 (Phone)

HOME PAGE: http://finance.wharton.upenn.edu/~mrrobert/

Michael Schwert (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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