Active Loan Trading

Frank J. Fabozzi, Sven Klingler, Pia Mølgaard, Mads Stenbo Nielsen

Research output: Working paperResearch

Abstract

The collateralized loan obligation (CLO) market withstood the recent financial crisis with minimal losses compared to other structured asset-backed securities. Furthermore, the issuance of new CLOs is now above pre-crisis levels, prompting an understanding of what drives CLO performance. A central difference between CLOs and other structured asset-backed securities is that the CLO manager actively rebalances the collateral pool, by selling and purchasing loans, to enhance the CLO performance. We analyze such trades executed by CLO managers and document the importance of “active loan trades” – trades executed at a manager’s discretion. We find that active loan sales are conducted at better prices than non-active sales and before rating downgrades. More active CLOs trade at better prices than less active CLOs, selling leveraged loans earlier and before they get downgraded. Finally, we observe that more active trading increases the returns to equity investors and lowers collateral portfolio default rates.
Original languageEnglish
Place of PublicationKøbenhavn
PublisherDanmarks Nationalbank
Number of pages45
Publication statusPublished - 19 Jun 2018
SeriesDanmarks Nationalbank. Working Papers
Number127
ISSN1602-1193

Keywords

  • Active management
  • Collateralized loan obligations (CLOs)
  • Market efficiency
  • Structured finance
  • Syndicated loans

Cite this

Fabozzi, F. J., Klingler, S., Mølgaard, P., & Nielsen, M. S. (2018). Active Loan Trading. København: Danmarks Nationalbank. Danmarks Nationalbank. Working Papers, No. 127
Fabozzi, Frank J. ; Klingler, Sven ; Mølgaard, Pia ; Nielsen, Mads Stenbo. / Active Loan Trading. København : Danmarks Nationalbank, 2018. (Danmarks Nationalbank. Working Papers; No. 127).
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Fabozzi, FJ, Klingler, S, Mølgaard, P & Nielsen, MS 2018 'Active Loan Trading' Danmarks Nationalbank, København.

Active Loan Trading. / Fabozzi, Frank J.; Klingler, Sven; Mølgaard, Pia; Nielsen, Mads Stenbo.

København : Danmarks Nationalbank, 2018.

Research output: Working paperResearch

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AU - Nielsen, Mads Stenbo

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N2 - The collateralized loan obligation (CLO) market withstood the recent financial crisis with minimal losses compared to other structured asset-backed securities. Furthermore, the issuance of new CLOs is now above pre-crisis levels, prompting an understanding of what drives CLO performance. A central difference between CLOs and other structured asset-backed securities is that the CLO manager actively rebalances the collateral pool, by selling and purchasing loans, to enhance the CLO performance. We analyze such trades executed by CLO managers and document the importance of “active loan trades” – trades executed at a manager’s discretion. We find that active loan sales are conducted at better prices than non-active sales and before rating downgrades. More active CLOs trade at better prices than less active CLOs, selling leveraged loans earlier and before they get downgraded. Finally, we observe that more active trading increases the returns to equity investors and lowers collateral portfolio default rates.

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KW - Structured finance

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Fabozzi FJ, Klingler S, Mølgaard P, Nielsen MS. Active Loan Trading. København: Danmarks Nationalbank. 2018 Jun 19.