Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/202867
Authors: 
Fabozzi, Frank J.
Klingler, Sven
Mølgaard, Pia
Nielsen, Mads Stenbo
Year of Publication: 
2018
Series/Report no.: 
Danmarks Nationalbank Working Papers 127
Abstract: 
The collateralized loan obligation, CLO, market withstood the recent financial crisis with minimal losses compared to other structured asset-backed securities. Furthermore, the issuance of new CLOs is now above pre-crisis levels, prompting an understanding of what drives CLO performance. A central difference between CLOs and other structured asset-backed securities is that the CLO manager actively rebalances the collateral pool, by selling and purchasing loans, to enhance the CLO performance. We analyze such trades executed by CLO managers and document the importance of "active loan trades" - trades executed at a manager's discretion. We find that active loan sales are conducted at better prices than non-active sales and before rating downgrades. More active CLOs trade at better prices than less active CLOs, selling leveraged loans earlier and before they get downgraded. Finally, we observe that more active trading increases the returns to equity investors and lowers collateral portfolio default rates.
Subjects: 
Financial markets
Instruments
JEL: 
G11
G12
G23
G24
Document Type: 
Working Paper

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