A Benchmark for Collateralized Loan Obligations

59 Pages Posted: 9 Jan 2021

See all articles by Redouane Elkamhi

Redouane Elkamhi

University of Toronto - Rotman School of Management

Ruicong Li

HKUST Business School

Yoshio Nozawa

Hong Kong University of Science and Technology

Date Written: November 18, 2020

Abstract

We build a benchmark for AAA-rated tranches of Collateralized Loan Obligations (CLOs) using Business Development Companies (BDCs), which hold a diversified portfolio of loans as CLOs do. However, BDCs are publicly listed, and their share price, equity volatility and borrowing cost are observable. Furthermore, BDCs' debt is not rated as AAA. Applying a structural model to BDCs, we extract market-implied correlation in their loan portfolio, compare spreads on CLO tranches and BDC-implied benchmark, and find that observed large credit spreads on CLO senior tranches after the financial crisis are a fair reflection of the systematic risk of correlated loan defaults.

Keywords: Corporate credit spreads, Structural credit risk models, the Merton model, Fixed income asset pricing

JEL Classification: G12, G13

Suggested Citation

Elkamhi, Redouane and Li, Ruicong and Nozawa, Yoshio, A Benchmark for Collateralized Loan Obligations (November 18, 2020). Available at SSRN: https://ssrn.com/abstract=3732614 or http://dx.doi.org/10.2139/ssrn.3732614

Redouane Elkamhi

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Ruicong Li

HKUST Business School ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Yoshio Nozawa (Contact Author)

Hong Kong University of Science and Technology ( email )

Clearwater Bay Road
Sai Kun, NT
Hong Kong

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