Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/278380 
Authors: 
Year of Publication: 
2023
Series/Report no.: 
ESRB Working Paper Series No. 141
Publisher: 
European Systemic Risk Board (ESRB), European System of Financial Supervision, Frankfurt a. M.
Abstract: 
This paper investigates how covenants, intrinsic to Collateralized Loan Obligation (CLO) indentures, may amplify idiosyncratic shocks, imposing negative externalities on unrelated firms in CLO portfolios. Following a negative shock to the oil & gas industry, CLOs with exposure to oil and gas loans are pushed closer to their covenant thresholds and fire-sell unrelated loans in the secondary loan market to alleviate these constraints. These fire sales exert price pressure on the securities of unrelated firms, creating market dislocations. The erosion in the liquidity positions of exposed firms spills over into real economic activity. The findings highlight the real effects from fire sales arising due to contracting frictions.
Subjects: 
covenants
contracting frictions
closed-end funds
fire sales
externalities
CLOs
JEL: 
E44
G23
E32
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-328-4
Document Type: 
Working Paper

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