The Role of Credit Rating Agencies in Securitized Products Pricing: Examining the Determinants of Primary Issuance Spreads in Collateralized Loan Obligation Markets

Abstract

In this paper, we test for factors investors use when determining primary issuance spreads on Collateralized Loan Obligations. We also examine the extent to which investors rely on credit rating agencies in determining this spread. We regress several CLO characteristics, including measures of credit support, size, complexity and credit rating on primary issuance spread. We find that investors generally rely on other key factors besides credit ratings; however, they rely on credit ratings across all market segments and periods. Because there is such emphasis on the credit rating, and because regulations, some of which are based on ratings, are being formed in attempts to improve structured product markets, we consider implications of our results and comment on the degree