Does Loan Securitization Expose Borrowers to Non-Bank Investor Shocks?—Evidence from Insurers
CLOs fund 65% of syndicated loans, theoretically insulating borrowers from bank and idiosyncratic investor shocks. However, concentrated capital and sticky relationships expose firms to idiosyncratic shocks to insurers, the largest CLO investors. We find that: 1) insurers experiencing favorable cash flows invest more in CLOs, especially with familiar managers; 2) CLO managers exposed to these cash flows launch more deals; 3) using an instrumental–variable approach, affected firms take out more loans at lower spreads, increase employment, and expand operations; 4) effects are stronger for private than public firms. These findings reveal significant frictions in the loan securitization market.
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