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Prof. Dushyantkumar Vyas
Professor
Department of Management
University of Toronto Mississauga

Despite persistent academic and regulatory concerns, Collateralized Loan Obligations (CLOs) have consistently demonstrated resiliency over the past two decades. We document that firms whose loans are acquired by CLOs are less likely to experience adverse credit events within 12 months of inclusion in the CLO portfolio, particularly when CLOs maintain institutional level relationships with originating banks (through repeated transactions) or when individual level relationships exist (as evidenced by personnel flows between originating banks and CLOs). The effects of these relationships are more pronounced when originating banks possess superior private information about borrowers. Furthermore, conditional upon filing for bankruptcy, borrowers whose loans are held by CLOs with institutional or individual level relationships are more likely to successfully restructure under Chapter 11. Collectively, our findings highlight dual information channels – both institutional and personnel-based – that mitigate information frictions in the leveraged loan market.