CLO-Bank Relationships: Evidence from Bankruptcy and Restructuring Outcomes of CLO-held Loans

Abstract

Loans in Collateralized Loan Obligations (CLO) portfolios are often originated by banks with established trading relationships with CLO managers. This study finds that firms whose loans are initially purchased by CLOs are less likely to experience negative credit events within the following 12 months when preexisting CLO–bank relationships exist, compared to other syndicated loan borrowers with similar market-perceived risk. The positive impact of CLO–bank relationships is particularly significant when banks possess greater private information about borrowers. Additionally, borrowers with loans held by relationship-driven CLOs are more likely to undergo successful restructurings in the event of subsequent bankruptcy. These advantages encourage CLO managers to strengthen such relationships through repeated transactions.