What lies beneath: An inside look at corporate CLOs collateral

Since 2000 collateralized loan obligations (CLOs) have been the dominant source of capital for the high-yield corporate loan market. Despite the widespread belief that the rise of CLOs has led to riskier lending, there is little evidence to support it. In this paper, we investigate whether securitization led to risky lending in the corporate loan market by examining the quality of individual loans held by CLOs. We find that, overall, securitized loans perform no worse than unsecuritized loans in terms of accounting returns, credit rating changes, and market-assessed probability of default. However, within a CLO portfolio, loans originated by the bank that acts as the CLO underwriter significantly underperform the rest of the loan portfolio.