Research

Job Market Paper

Intermediary Frictions and the Corporate Credit Cycle: Evidence From CLOs

Abstract:

I quantify the contribution of intermediary agency frictions to the cyclicality of lending by non-bank intermediaries. I focus on collateralized loan obligations (CLOs), which are actively managed closed-end funds that provide about one-third of the credit to speculative-grade corporations in the US and are particularly cyclical in their lending. For variation in agency frictions, I exploit an institutional feature that leads to variation in CLOs' discretion to trade their assets. I document that CLOs' cost of debt contains significant compensation for agency problems. Agency problems intensify in bad times when aggregate volatility rises, raising CLOs’ cost of debt, and reducing the issuance of new CLOs. This affects real outcomes of CLO-dependent firms. To mitigate this effect, CLOs issued in volatile periods restrict their discretion in trading, which, however, also reduces their alpha. Calibrating a novel intermediation model to these reduced-form estimates, I find that more than half of the steep fall in CLO issuance during volatile periods is due to agency frictions. A counterfactual analysis reveals that without CLOs restricting their discretion in volatile periods, CLO issuance would be substantially more cyclical and real effects on speculative-grade firms correspondingly larger.

Working Papers

Nonbank Lending and Credit Cyclicality with Manasa Gopal, German Gutierrez, and Sebastian Hillenbrand

R&R Review of Financial Studies

Abstract:

We document three facts about nonbank lending in the syndicated loan market. First, nonbank lending is more than twice as cyclical as bank lending. Second, declines in nonbank lending explain most of the declines in syndicated lending during the Great Recession and COVID-19 crisis. Third, cyclicality in nonbank lending is matched by cyclicality in nonbank funding flows. The higher nonbank cyclicality is not explained by either the health or monitoring ability of banks, nor by bank-borrower relationships. Instead, it appears to be driven by nonbank funding instability. We highlight frictions in CLOs and mutual funds that contribute to this instability.

The Myth of the Lead Arranger’s Share with Kristian Blickle, Sebastian Hillenbrand, and Anthony Saunders

R&R Journal of Finance

Best Paper Award Muenster Banking Workshop

Abstract:

We challenge theories that lead arrangers retain shares of syndicated loans to overcome information asymmetries. Lead arrangers frequently sell their entire loan stake – in over 50% of term and 70% of institutional loans. These sell-offs usually occur days after origination, with lead arrangers retaining no other borrower exposure in 37% of sell-off cases. Counter to theories, sold loans perform better than retained loans. Our results imply that information asymmetries could be lower than commonly assumed or mitigated by alternative mechanisms such as underwriting risk. We also provide guidance for Dealscan users on how to approximate loan ownership after origination.