How much do Investors Rely on Credit Ratings: Empirical evidence from the US and EU CLO primary market

We investigate the extent to which investors rely on credit ratings and other factors beyond credit ratings in determining the funding cost for collateralized loan obligations (CLOs) tranches in the period 1997-2015. We find significant differences between the United States (U.S.) and European Union (E.U.) markets. In the U.S., we find a much higher and more consistent degree of reliance on credit ratings and other factors in pricing CLOs over time compared to the E.U. market. Finally, we find that investors in both markets reduce, rather than increase, funding costs when rating standards loosened. The implications for market practices are discussed.