Intermediary Frictions and the Corporate Credit Cycle: Evidence From CLOs

119 Pages Posted: 22 Nov 2022 Last revised: 26 Jan 2024

Date Written: November 16, 2022

Abstract

I quantify the contribution of intermediary agency frictions to the cyclicality of lending by collateralized loan obligations (CLOs). CLOs’ cost of debt contains significant compensation for agency problems arising from CLOs’ discretion in trading. Agency problems intensify in volatile periods, raising CLOs’ cost of debt, reducing the issuance of new CLOs, and affecting real outcomes in CLO-dependent firms. To mitigate this effect, CLOs issued in volatile periods restrict their discretion, which, however, also limits valuable trading. Using a structural model, I estimate that one third of the steep fall in CLO issuance during volatile periods is due to agency frictions.

Keywords: Credit cycle, intermediary frictions, agency frictions, CLOs, non-banks

JEL Classification: G23, E32, E44, G01

Suggested Citation

Fleckenstein, Quirin, Intermediary Frictions and the Corporate Credit Cycle: Evidence From CLOs (November 16, 2022). Available at SSRN: https://ssrn.com/abstract=4278636 or http://dx.doi.org/10.2139/ssrn.4278636

Quirin Fleckenstein (Contact Author)

HEC Paris - Finance Department ( email )

France

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