Collateralized loan obligations (CLOs)

: an analysis of CLO risk today compared to CDOs during the global financial crisis

Abstract

Since the Global Financial Crisis (GFC), structured credit has attracted public notice. While the issuance of subprime mortgage CDOs has declined after the GFC, other forms of securitization have grown substantially – in particular, collateralized loan obligations (CLOs). Those instruments invest in leveraged loans, meaning bank loans to highly indebted companies. In 2018 and 2019, prominent public figures, institutions and the financial press voiced concerns over leveraged loans and CLOs and the way they bear upon financial stability. This dissertation compares the current CLO market with that of subprime CDOs during the GFC, examining the structure and function of both instruments. An analytical framework of factors that helped cause and/or accelerate the GFC is established and then applied to CLOs. The results of this study show that CLOs today are less complex than CDOs were in the run-up to the GFC and tend not to be leveraged by using short-term repo financing. However, similar to CDOs, the credit quality of the underlying assets in CLOs is deteriorating while credit rating agencies persist in misstating the underlying default probabilities. Overall, “irrational exuberance” in the CLO market seems less accentuated than in the CDO markets before the GFC. However, investors and policymakers should anticipate substantial losses in these markets caused by the current global recession.

Date of Award	16 Oct 2020
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Peter V. Rajsingh (Supervisor)