Securitization without adverse selection: The case of CLOs

Efraim Benmelech, Jennifer Dlugosz and Victoria Ivashina

Journal of Financial Economics, 2012, vol. 106, issue 1, 91-113

Abstract: 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.

Keywords: Structured finance; Collateralized loan obligations (CLOs); CDOs; Syndicated loans (search for similar items in EconPapers)
JEL-codes: G21 G23 G24 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (103)

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Working Paper: Securitization without Adverse Selection: The Case of CLOs (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:106:y:2012:i:1:p:91-113

DOI: 10.1016/j.jfineco.2012.05.006

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