Securitization without adverse selection: The case of CLOs

In this paper, we investigate whether securitization was associated with risky lending in the corporate loan market by examining the performance of individual loans held by collateralized loan obligations. We employ two different data sets that identify loan holdings for a large set of CLOs and find...

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Bibliographic Details
Published inJournal of financial economics Vol. 106; no. 1; pp. 91 - 113
Main Authors Benmelech, Efraim, Dlugosz, Jennifer, Ivashina, Victoria
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.10.2012
Elsevier Sequoia S.A
Subjects
Adverse selection
Assets
CDOs
Collateralized loan obligations
Collateralized loan obligations (CLOs)
Corporate debt
Economics
Incentives
Loans
Obligation
Panel data
Participating loans
Portfolio performance
Portfolio selection
Portfolios
Securitization
Security
Structured finance
Studies
Syndicated loans
Collateralized loan obligations (CLOs)
G21
Structured finance
G24
G23
CDOs
Syndicated loans
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Summary:In this paper, we investigate whether securitization was associated with risky lending in the corporate loan market by examining the performance of individual loans held by collateralized loan obligations. We employ two different data sets that identify loan holdings for a large set of CLOs and find that adverse selection problems in corporate loan securitizations are less severe than commonly believed. Using a battery of performance tests, we find that loans securitized before 2005 performed no worse than comparable unsecuritized loans originated by the same bank. Even loans originated by the bank that acts as the CLO underwriter do not show under-performance relative to the rest of the CLO portfolio. While some evidence exists of under-performance for securitized loans originated between 2005 and 2007, it is not consistent across samples, performance measures, and horizons. Overall, we argue that the securitization of corporate loans is fundamentally different from securitization of other assets classes because securitized loans are fractions of syndicated loans. Therefore, mechanisms used to align incentives in a lending syndicate are likely to reduce adverse selection in the choice of CLO collateral.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
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ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2012.05.006