Are CLO Collateral and Tranche Ratings Disconnected?

John M Griffin and Jordan Nickerson

The Review of Financial Studies, 2023, vol. 36, issue 6, 2319-2360

Abstract: Between March and August 2020, S&P and Moody’s downgraded approximately 25$\%$ of collateral feeding into CLOs and only 2$\%$ of tranche values, with rating actions concentrating in junior tranches. Both S&P and Moody’s modeling indicate that the impacts should have been considerably larger, especially for higher-rated tranches. Neither changes in correlation nor the accumulation of pre-COVID-19 protective cushions can explain the downgrade asymmetry on upper tranches. Instead, CLO managers repositioned their collateral pools to dampen the negative credit shock and rating agencies incorporated qualitative adjustments in their CLO ratings. Important potential policy and market implications from these findings are discussed.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

JEL-codes: G14 G24 G28 G32 (search for similar items in EconPapers)
Date: 2023
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