Thomas Mählmann

Did investors outsource their risk analysis to rating agencies? Evidence from ABS-CDOs

Based on a sample of 3254 floating rate tranches from 617 ABS-CDOs (collateralized debt obligations backed by asset-backed securities), this paper tests the “rating overdependence” hypothesis – i.e., that ratings of structured products are a sufficient statistic (in terms of predicting future credit performance) for yield spreads at origination. The paper’s findings are fourfold. First, yield spreads at issuance predict future performance of ABS-CDO tranches even after controlling for the information contained in ratings. Second, the ability of yield spreads to predict future performance, however, is driven exclusively by ratings below AAA (and, to a lesser extent, also by the lowest priority AAA tranches), whereas spreads of super senior AAA tranches show no information content. Third, the predictive ability of yield spreads is lower for tranches from later vintages and for tranches from deals with more complex collateral pools. Fourth, the conditional correlation between ratings and spreads, in turn, is increasing in time and higher for tranches from complex deals. In sum, the evidence indicates that investors in (especially AAA) tranches from later and more complex deals have avoided performing costly due diligence on the securities they bought.

Ableitung markt-impliziter Ratings aus Credit Default Swap-Spreads

Langfristig geglattete CDS-implizite Ratings stellen eine sinnvolle Erganzung zu Agenturratings dar. Sie weisen eine relativ gute Ubereinstimmung mit den entsprechenden Einschatzungen der Agenturen auf und verfugen zusatzlich uber eine akzeptable Stabilitat. Letztere ist zwar bei den Marktratings angesichts der zugrundeliegenden point-in-time Philosophie geringer als bei Agenturratings, dies wird allerdings auf der anderen Seite durch ein deutlich hoheres Mas an Aktualitat ausgeglichen. So konnen sowohl Agenturrating-Downgrades als auch in Teilen Agenturrating-Upgrades bis zu 120 Handelstage im Vorfeld von Ratingevents in signifikantem Mase durch markt-implizite Ratings antizipiert werden.

Are Professional Investment Managers Skilled? Evidence from Syndicated Loan Portfolios

Theory predicts that individual investor’s incentives to uncover new information about asset values are low if asset prices are efficient. This, in turn, implies that heterogeneity in investment manager skill, if present, should be most clearly visible among managers that focus on asset classes with less informationally efficient prices. We investigate this argument using a large sample of syndicated bank loan portfolios managed by collateralized loan obligation (CLO) managers. Using a CLO’s equity tranche cash-on-cash return to measure performance, we find strong persistence that is robust to an extensive set of risk controls. Although investors seem to derive their expectation about management quality from a manager’s realized performance and allocate more capital to “skilled” managers, top performers cope to stay ahead of net-of-fees. This questions the rationality of managers and the efficiency of the syndicated loan market. This paper was accepted by Wei Jiang, finance.

The Disciplinary Role of CDS Markets: Evidence from Agency Ratings

Since the beginning of the financial crisis there have been various attempts to correct weaknesses within the rating process. Most of these initiatives aim at incentivizing rating agencies by increasing regulatory pressure. We argue that there is another way to discipline agencies: the credit default swap (CDS) market. Based on a sample of more than 4,000 corporate bond issues, we show that purely the existence of an external CDS benchmark leads to an increased level of rating quality. In particular, we show that ratings monitored by an actively traded CDS are more strongly correlated with bond spreads at issuance, timelier adjusted when credit-worthiness changes, better predictors of defaults, and less volatile. Moreover, we provide evidence that the observed quality improvements are most likely driven by reduced incentive conflicts stemming from increased reputational concerns.