Working Papers

Mustafa Emin, Christopher James, Tao Li, Jing Lu

Invited to present at: CICF, FIFI, FMA, FMCG, FSB-IOSCO, NBER SI, Tulane University, University of Florida

There are two major institutional investors in the syndicated loan market: collateralized loan obligations (CLOs) and bank loan mutual funds. CLOs are closed-end funds while bank loan mutual funds are open-end funds that issue claims that are redeemable on demand. In this paper, we examine whether CLOs loan purchases serve to reduce the fragility of loan funds. Despite differences in the way loans and bonds are traded, we find little evidence of greater fragility among loan funds than corporate bond funds. Indeed, most of our tests suggest lower arbitrage costs and lower fire-sale discounts for loan funds than for high yield bond funds. We provide evidence that the resilience of loan funds arises, in part, from CLOs providing liquidity through par building trades in discounted loans when loan funds experience large outflows.

Mustafa Emin, Christopher James

Invited to present at: Fed Richmond, University of Florida, WFA

The valuation of bank loans by mutual funds is challenging because loans are not traded on a centralized exchange and loan trades lack post trade transparency. Thus, estimating the value of loans involves discretion on the part of fund managers. In this paper we examine whether loan mutual fund managers use their discretion to misreport returns and whether misreported returns affect investment flows. Overall, we find that evidence of return smoothing by loan funds particularly during periods of market illiquidity We find that institutional investors, but not retail investors, discount reported performance of funds that value their holdings aggressively.

Dominique Badoer, Mustafa Emin, Christopher James

Invited to present at: University of Illinois at Chicago

We investigate the effectiveness of security in protecting creditors from dilution arising from litigation and other non-debt related claims; claims we refer to as exogenously unsecured. Consistent with this security affording greater protection from dilution, we find that disclosures of litigation claims are associated with a significant increase in the spread between a firm’s unsecured and secured and debt claims. More important, we find that the propensity of material litigation claims is negatively related to firms’ reliance on secured debt. Our findings are consistent with the notion that collateral provides protection from litigation claims, and thus is an additional motivation for firms to borrow on a secured basis, even in circumstances where covenants on unsecured claims might be effective in mitigating the agency costs of debt.

Revision Requested at JFQA

Dominique Badoer, Mustafa Emin, Christopher James

Invited to present at: Australian National University, Copenhagen Business School, FMA

Reputational capital is a frequently cited attribute of private equity transactions. In this paper we construct a simple model to illustrate the relationship between reputational capital, covenants and loan spreads in the leveraged loan market. Our model predicts that reliance on reputational capital varies inversely with a sponsor’s past loan performance and the efficiency of the enforcement formal contracts terms. Our model also predicts that for sponsored deals, spreads will be lower on Cov-Lite loans than loans with maintenance covenants. Using a large sample of leveraged loans originated between 2005 and 2018, we find evidence consistent with these predictions.

Publications

Sumru Altug, Mustafa Emin, Bilin Neyapti

International Finance, Volume: 15-3, pg. 347-366, 2012

This paper investigates the relationship between the main features of business cycles and the institutional and structural characteristics of countries of up to 62 industrial, emerging and formerly centrally planned economies from all continents. We derive the business cycle characteristics using the nonparametric Harding-Pagan approach. Our analysis reveals that institutional factors have significant associations with the duration and amplitude of business cycles. Examining the determinants of business cycle synchronization for the countries in our sample, we also demonstrate that the bilateral proximity of institutional and policy environments matters in addition to the gravity arguments, trade intensity and bilateral financial linkages used in earlier studies.