Do Lending Relationships Matter When Loans Are Securitized?

Abstract

This paper documents a novel ``fire-sale insurance" channel through which lending relationships help borrowers when their loans are securitized into CLOs. We document that CLO managers avoid selling the loans of firms related to their underwriter bank when liquidity shocks induce selloffs. Immunity from fire-sales translates into higher borrowing and investment rates for relationship firms even when their CLO investors are under stress. Banks benefit from higher fee revenue and compensate the CLO managers by arranging cheaper debt financing on their new CLOs. These results highlight why relationships continue to remain valuable in the originate-to-distribute model of banking.

Keywords: Lending Relationships, Collateralized Loan Obligations, Fire Sale, Leveraged Loans

JEL Classification: G11, G21, G23, G32, G34