Portfolio Performance Manipulation in Collateralized Loan Obligations

58 Pages Posted: 5 Jul 2016 Last revised: 13 Sep 2021

See all articles by Maria Loumioti

Maria Loumioti

The University of Texas at Dallas

Florin P. Vasvari

London Business School

Date Written: September 20, 2018

Abstract

We examine the discretionary activities that CLO managers engage in to pass monthly overcollateralization (OC) tests. These tests require a CLO’s loan portfolio value, scaled by the CLO notes’ principal balance, to be above a certain threshold. Using CLOs’ granular disclosures, we develop model-free estimates for discretionary loan fair valuation and transaction-based proxies for strategic loan trading. We find a positive association between these discretionary activities and the probability of avoiding an OC test violation. This association varies predictably with junior noteholders’ influence and CLO market conditions. Strategic trading—but not discretionary fair valuation—relates to worse future CLO performance.

Keywords: Collateralized loan obligation, CLO, securitization, managerial discretion, loan fair valuation, strategic loan trading

JEL Classification: M41, G23

Suggested Citation

Loumioti, Maria and Vasvari, Florin P., Portfolio Performance Manipulation in Collateralized Loan Obligations (September 20, 2018). Journal of Accounting & Economics (JAE), Vol. 67, No. 1, 2019, Available at SSRN: https://ssrn.com/abstract=2803704 or http://dx.doi.org/10.2139/ssrn.2803704

Maria Loumioti (Contact Author)

The University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Florin P. Vasvari

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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