Portfolio performance manipulation in collateralized loan obligations

摘要

We examine the discretionary activities that CLO managers engage in to pass monthly over-collateralization (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.