New Publication "Negative externalities of mutual fund instability: Evidence from leveraged loan funds" by Thomas Mählmann in Journal of Banking and Finance

Leverage Loans make a big and constantly growing part of financing for risky corporations. Because of an increasing role of investment funds in this market segment, there are concerns that liquidity problems for funds could influence the financing situation of corporations negatively. In his paper "Negative externalities of mutual fund instability: Evidence from leveraged loan funds"Thomas Mählmann investigates whether capital redemptions by fund investors trigger a mutually reinforcing downward spiral of credit prices and fund outflows.

The paper provides evidence consistent with the view that in times of loan market stress, fund flows and loan price returns have been pro-cyclical, i.e., have reinforced each other's movements. Furthermore, fund outflows foster market illiquidity. Importantly, the paper identifies lending by CLOs as a channel through which outflow-induced price dislocations in the secondary market transmit to corporate borrowing, making it harder for leveraged companies to rollover their existing debt exactly at a time when liquidity is needed most (in market downs).