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A Benchmark for Collateralized Loan Obligations

Author

Listed:
  • Redouane Elkamhi

    (Rotman School of Management, Toronto, Ontario M5S 3E6, Canada)

  • Ruicong Li

    (Department of Finance, Hong Kong University of Science and Technology, Hong Kong SAR)

  • Yoshio Nozawa

    (Rotman School of Management, Toronto, Ontario M5S 3E6, Canada; and UTSC, Toronto, Ontario M5S 3E6, Canada)

Abstract

We build a benchmark for AAA-rated tranches of collateralized loan obligations (CLOs) using business development companies (BDCs), which hold a diversified portfolio of loans as CLOs do. BDCs are publicly listed, and their share price, equity volatility, and borrowing cost can be easily obtained. Applying a structural model to BDCs, we extract market-implied correlation in their loan portfolio, compare spreads on CLO tranches and BDC-implied benchmark, and find that observed large credit spreads on CLO senior tranches after the financial crisis are a fair reflection of the systematic risk of correlated loan defaults.

Suggested Citation

  • Redouane Elkamhi & Ruicong Li & Yoshio Nozawa, 2025. "A Benchmark for Collateralized Loan Obligations," Management Science, INFORMS, vol. 71(3), pages 1944-1966, March.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:3:p:1944-1966
    DOI: 10.1287/mnsc.2022.00097
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