Abstract
Using detailed loan holding data of Collateralized Loan Obligations (CLOs), we document empirical evidence for systemic risk due to leverage constraints on CLOs. Constrained CLOs fire sell loans downgraded to CCC or below, and thus loans widely held by constrained CLOs experience temporarily lower prices. This instability is exacerbated over time. As the CLO market grows, each CLO's effort to diversify its portfolio leads to similarity in loan holdings among CLOs, such that their leverage constraint binds simultaneously. CLOs' overlapping loan holdings transform idiosyncratic credit risk of large borrowers to systemic risk in the leveraged loan market.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.