A Benchmark for Collateralized Loan Obligations

Redouane Elkamhi (), Ruicong Li () and Yoshio Nozawa ()
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Redouane Elkamhi: Rotman School of Management, Toronto, Ontario M5S 3E6, Canada
Ruicong Li: Department of Finance, Hong Kong University of Science and Technology, Hong Kong SAR
Yoshio Nozawa: Rotman School of Management, Toronto, Ontario M5S 3E6, Canada; and UTSC, Toronto, Ontario M5S 3E6, Canada

Management Science, 2025, vol. 71, issue 3, 1944-1966

Abstract: We build a benchmark for AAA-rated tranches of collateralized loan obligations (CLOs) using business development companies (BDCs), which hold a diversified portfolio of loans as CLOs do. BDCs are publicly listed, and their share price, equity volatility, and borrowing cost can be easily obtained. Applying a structural model to BDCs, we extract market-implied correlation in their loan portfolio, compare spreads on CLO tranches and BDC-implied benchmark, and find that observed large credit spreads on CLO senior tranches after the financial crisis are a fair reflection of the systematic risk of correlated loan defaults.

Keywords: corporate credit spreads; structural credit risk models; the Merton model; fixed income asset pricing (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:3:p:1944-1966

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