Portfolio performance manipulation in collateralized loan obligations

Maria Loumioti and Florin P. Vasvari

Journal of Accounting and Economics, 2019, vol. 67, issue 2, 438-462

Abstract: We examine the discretionary activities that CLO managers engage in to pass monthly overcollateralization (OC) tests. These tests require a CLO's loan portfolio value, scaled by the CLO notes’ principal balance, to be above a certain threshold. Using CLOs’ granular disclosures, we develop model-free estimates for discretionary loan fair valuation and transaction-based proxies for strategic loan trading. We find a positive association between these discretionary activities and the probability of avoiding an OC test violation. This association varies predictably with junior noteholders’ influence and CLO market conditions. Strategic trading—but not discretionary fair valuation—relates to worse future CLO performance.

Keywords: Collateralized loan obligation; CLO; Securitization; Managerial discretion; Loan fair valuation; Strategic loan trading (search for similar items in EconPapers)
JEL-codes: G23 M41 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:67:y:2019:i:2:p:438-462

DOI: 10.1016/j.jacceco.2018.09.003

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