The Alchemy of CDO Credit Ratings
Collateralized Loan Obligations (CLOs) were one of the largest and fastest growing segments of the structured finance market, fueling the 2003-2007 boom in syndicated loans and leveraged buyouts. The credit crisis brought CLO issuance to a halt, and as a result the leveraged loan market dried up. Similar to other structured finance products, investors in CLOs rely heavily on credit rating provided by the rating agencies, yet little is known about CLO rating practices. This paper attempts to fill that gap. Using novel hand-collected data on 3,912 tranches of Collateralized Loan Obligations (CLO) we document the rating practices of CLOs and analyze their existing structures.
This paper has being prepared for the Carnegie-Rochester conference series. We are grateful for comments from Adam Ashcraft, Amit Seru, Andrei Shleifer, Jeremy Stein, The Editors (Marvin Goodfriend and Bennett McCallum), and seminar participants at the Carnegie-Rochester November 2008 conference, Harvard University and the Stockholm Institute for Financial Research. We thank Shaunak Vankudre, Alex Radu, Daniel Oshima, and Akilah Crichlow for excellent research assistance. All remaining errors are our own. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.