European arbitrage CLOs and risk retention

Demir Bektić and Britta Hachenberg

The European Journal of Finance, 2021, vol. 27, issue 18, 1791-1803

Abstract: In this article, we empirically analyze European Collateralized Loan Obligations (CLOs) in the aftermath of the financial crisis. As Regulation introduced the so-called risk retention rule, originally designed to align interests between issuers and investors, we analyze the implications and effects of the risk retention rule on managed cash CLOs (arbitrage deals). Although the market suffered severely during the period after the rule was introduced, an alignment of interests between issuers and investors does not necessarily seem to have been attained. Here, we examine the implications of risk retention on asset pricing and find that CLO manager experience, credit rating and issuance amount are important factors that significantly influence pricing expectations of CLO investors. However, the form in which the CLO manager retains the risk does not seem to play a role.

Date: 2021
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DOI: 10.1080/1351847X.2021.1900887

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