Graduation Year
2026
Date of Submission
4-2026
Document Type
Open Access Senior Thesis
Degree Name
Bachelor of Arts
Department
Economics
Reader 1
Yaron Raviv
Abstract
This thesis examines whether post-crisis changes in leveraged loan characteristics have increased the underlying credit risk embedded in collateralized loan obligation (CLO) portfolios and whether that risk is fully reflected in market pricing. Since the Global Financial Crisis, the leveraged loan market has expanded significantly alongside the growth of CLOs, while underwriting standards have weakened through higher borrower leverage, covenant-lite lending, and greater private equity sponsorship. Although post-crisis CLOs are often viewed as more resilient because of stronger structural protections, the quality of the underlying collateral remains central to overall risk. Using loan-level data from the Refinitiv DealScan database from 2000 to 2026, this study compares pre-crisis loans with post-crisis loans across borrower fundamentals, pricing, and tail-risk exposure through descriptive statistics, OLS regressions of all-in drawn spreads, and logistic regressions of downside scenarios including wipeout risk, fire-sale exposure, and timing risk. Synthetic credit ratings and a composite stress score are used to approximate collateral quality. The results show that post-crisis loans are more highly levered, more likely to be covenant-lite, and more frequently sponsor-backed, while also exhibiting greater exposure to severe downside scenarios despite stronger reported interest coverage. Although markets partially price this deterioration through higher spreads, covenant weakness and tail-risk concentration are not fully reflected at origination. These findings suggest that modern CLO collateral pools may appear stable under normal conditions while becoming more vulnerable during periods of correlated stress and market illiquidity, implying that stronger CLO structures may reduce moderate losses but do not eliminate exposure to severe collateral deterioration.
Recommended Citation
Gehring, Francis P. IV, "Hidden Fragility: Leveraged Loan Risk and Tail Exposure in the CLO 2.0 Era" (2026). CMC Senior Theses. 4185.
https://scholarship.claremont.edu/cmc_theses/4185
