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CLO & Structured Credit

Global Home > CLO & Structured Credit

New Covenant Limits Maturity Risk in European CLOs

Fitch Ratings says new covenant being introduced by some European CLOs limits maturity risk by typically setting the maximum proportion of assets with a maturity of more than 11 years after the issue date to 10% of the portfolio balance. This covenant limits the risk of the manager having to sell distressed assets at the transaction legal maturity date. 

U.S. CLOs Pare Exposure to American Tire Distributors

A single default in isolation, as is the case in the bankruptcy filing of American Tire Distributors (ATD), is not expected to have a rating impact on investment grade CLO bonds due to the diversified nature of broadly syndicated loan (BSL) CLOs, but a default may be more consequential to junior overcollateralization tests.

European CLOs See More Limits on Negative Trade Cash Balances

Fitch Ratings says some CLO investors over the past nine months have introduced restrictions on negative trade cash balance in European CLO documentation. The agency observed that some recent European CLOs are limiting the amount by which CLO managers can make unfunded commitments that would cause a negative trade date cash balance. 

US Leveraged Finance and CLO Weekly

Fitch 50, CLO Retail Exposure Limited, Fallen Angel Risk to HY Market

The latest update to our recurring U.S. corporate bankruptcy case-study series found that bankruptcies remain a rare occurrence for the automotive industry in recent years, with zero defaults in 2017. High-yield bond default rates for auto companies exhibit a spiky pattern and averaged 6.9% during 2001–2017, higher than the 4.1% cross-sector rate over the same period. This reflects widespread defaults in the sector from late 2007 through 2009.

Fitch U.S. CLO Index

U.S. CLO Index: Default Trough Supports CLO Metrics

A benign default environment and stable economic trends for underlying leveraged obligors are supporting credit metrics for U.S. broadly syndicated loan (BSL) CLOs, Fitch Ratings notes in its latest U.S. CLO Index. 

CLO Concentration a Potential Risk

Industry- or sector-concentrated portfolios within collateralized loan obligations (CLOs) should cause concern for senior debt investors. Diversification has been a key mitigant to prevent losses from impacting 'AAAsf' investors during past default cycles.

European CLO Index Q218

'AAA' Credit Enhancement Decreases in European CLOs; Retail Exposure Limited

Fitch Ratings says in a new report that European CLOs have seen a fall in 'AAA' credit enhancement (CE) and a widening in senior spreads. On the collateral side, diversification continues to increase and retail exposure remains limited.

US CLO Default Exposure Low for Now

While defaults in Fitch-monitored U.S. broadly syndicated loan (BSL) CLOs reached a low point in August, new defaults are likely in the near term, including some that are widely held.

US Bank TruPS CDO Portfolio Notional Declines in 2Q18

The number of combined defaults and deferrals for U.S. bank TruPS CDOs declined to 11.3% of the original collateral balance of $37.7 billion at the end of 2Q18 from 11.8% at the end of 1Q18, according to the latest index results published today by Fitch Ratings.

Data Highlights Differences Across MM CLO Portfolios

Fitch Ratings' latest U.S. Middle Market (MM) CLO Snapshot highlights differences in portfolio composition across Fitch-rated U.S. MM CLO managers. The gap between the highest and lowest Weighted Average Spread (WAS) measured 1.3% while the difference in obligor count between the least and most diversified portfolios exceeded 100.

Virtual Investor Series 2018

Global Virtual Investor Meeting Videos

This series features senior analysts across our structured finance teams answering the questions we regularly address in one-on-one investor meetings. It covers overall market trends, specific transaction performance, and broad economic issues to give you the insights and perspective you’d get at one of our in-person meetings.

 

Watch the Videos

 

Late Cycle Behaviors Worth Watch for U.S. CLOs

Supply and demand imbalances in the leveraged loan market are leading to what Kevin Kendra, U.S. CLO Group Head, calls some late cycle credit behaviors that U.S. CLO investors should keep a close eye on.

Watch the rest of our Virtual Investor Meetings

US CLOs Eye New Energy Loans Amid Residual Risk

U.S. CLOs are not shying away from new loans being issued by the energy sector despite the continued risk of defaults in their legacy holdings, largely to loans issued when oil prices were higher, Fitch Ratings says. CLO exposure to the energy sector could increase on strong energy issuance for the year.

Updated CLOs and Corporate CDOs Rating Criteria

The updates primarily include (i) the update of the obligor concentration stress methodology; (ii) updates to the standard recovery rate assumptions for European Group B countries; and (iii) updates to the default timing assumptions for cash flow analysis.

SME CLO Compare

Our SME Compare tracks the performance of all SME CLO transactions monitored by Fitch based on our investor reports.

Structured Finance Faces LIBOR Coordination Risk

Stronger provisions in transaction documentation ahead of LIBOR's discontinuation are an important step to limit the number of legacy structured finance (SF) contracts, Fitch Ratings says. However, much still needs to be done before the end of 2021 when forced LIBOR panel participation will end.

Ramp Benefit to U.S. CLO Investors May Decline

High portfolio ramp has meant higher portfolio certainty for new collateralized loan obligation (CLOs) so far in 2018. However, the proportion of assets actually purchased and currently in a CLO portfolio at close may fall or CLOs may start deferring issuance if the current high demand prevents managers from sourcing new institutional leveraged loans.

Senior US CLO Notes Resilient Under LevLoan Stresses

Loosening loan documentation, rising senior leverage and other late-cycle changes in leveraged loan credit dynamics suggest recoveries could come under greater stress in the next downturn, but we expect senior CLO ratings to withstand this pressure under three stress scenarios of differing severity. 

Questions and Answers From Asia on Leveraged Loans, CLOs

The U.S. administration's approach to domestic regulation and tax policy has been net positive for Fitch Ratings' corporate portfolio, Fitch says in its report "What Investors Want to Know: Recent Questions from Asia on U.S. Leveraged Loans and CLOs", published today.
 

US Bank TruPS CDOs 1Q18 Index Shows Combined Default & Deferral Rate Decline

The number of combined defaults and deferrals for U.S. bank TruPS CDOs declined to 11.9% of the original collateral balance of $37.7 billion at the end of 1Q18 from 12.6% at the end of 4Q17.

Second-Lien Exposure Rising for US CLOs

Second-lien exposure in US broadly syndicated loan collateralized loan obligations (CLOs) is on the rise after a decline since the latest peak in mid-2015. Recently launched US CLOs rated by Fitch Ratings have been building in higher limits for second-lien exposure, likely for flexibility to manage weighted average spread pressures.

Collateral Sourcing Challenges US Middle Market CLOs

Cash balances in middle market CLOs have increased as competition for the smaller but better yielding assets challenges managers.

5th Annual Investors’ Conference on European CLOs and Leveraged Loans

Wed, April 11 at 8:00am
London Hilton on Park Lane, 22 Park Lane, London, UK

US CLO Reinvestment Period Gap Widening Will Continue

The gap between long and short reinvestment periods for reset CLOs in the US has widened in 2018 as managers contend with different market signals, including height-of-market pricing and documentation terms in the underlying US leveraged loans and rising interest rates.

Risk Retention End Will Not Increase US CLO Risk

Eliminating the rules requiring managers of 'open market CLOs' to hold a certain portion of their CLOs is unlikely to lead to an increase in risk for note holders. In the near term, the regulation's withdrawal is unlikely to change CLO structures. However, if it is upheld, the subsector could see increased participation from smaller firms, as one barrier to entry will have been removed.

What to Watch in 2018

Outlooks compendium for US CLO and Leveraged Finance

Broadcasting/Media Default Rise Minimally Affects US CLOs

A rise in broadcast and media (B&M) leveraged loan defaults should not have a negative effect on the U.S. CLOs we rate as they have low levels of exposure to only a few of the issuers with the highest risks of default, Fitch Ratings says.
 

US CLO Index

Latest: Steady Performance in 4Q Despite November Leveraged Loan Default Spike

Strong CLO Appetite Keeps Issuance at Highs

Collateralized loan obligation (CLO) issuance finished last year dramatically higher on both sides of the Atlantic with investor appetite likely to remain robust in 2018, according to Fitch Ratings in its latest Global CLO Market Trends Quarterly.

US CLO Spread Compression Set to Continue in 2018

Spreads on CLO notes rated from 'AAA' to 'BBB' will be further squeezed in 2018 by demand from investors as they continue to hunt for yield. Spreads on notes issued by broadly syndicated loan CLOs have declined during 2017, with 'BBB'-rated issues seeing the biggest compression within the investment-grade rated level. 

European CLO 2.0. Move to Longer Life; Multi Currencies Absent

Fitch Ratings has observed in a new report that the weighted average life (WAL) test has become one of the most constraining factors for reinvestment in European CLOs, leading CLO managers to extensively reset their earlier transactions or extend the WAL during a refinancing.

Toys 'R' Us Bankruptcy Has No Rating Impact on US CLOs

The bankruptcy filing by Toys 'R' Us (Toys) yesterday has no rating impact on U.S. broadly syndicated loan (BSL) CLOs, due to the limited exposure they have to the U.S. retailer and diversified nature of CLO 2.0 portfolios.
Related: Toys 'R' Us' IDR Downgraded to 'D'Retail Institutional Default Rate Could Top 10% With Toys R Us

Redemptions Slow for US Bank TruPS CDOs as Mezz Notes Recover

As redemptions slow for US bank TruPS CDOs, actions by the largest banks will have the most significant impact on ratings given the high portfolio concentration.

European CLO Index

Latest: Robust Issuance, Low Spread and Good Performance

Global CLO Market Trends Quarterly

Latest:  US Issuance Surges, European Issuance Up, European Loans Start to Look Like 2007

Virtual Investor Meeting: Spread Compression Biggest Challenge for US CLOs

With sector and systemic risk largely contained, US CLO managers will be grappling with the more formidable structural challenge of spread compression for the remainder of this year.

Contacts

Ben McCarthy

APAC

Ben McCarthy

Analytical

+61 2 8256 0388

Matthias Neugebauer

EMEA

Matthias Neugebauer

Analytical

+44 20 3530 1099

Kevin Kendra

North America

Kevin Kendra

Analytical

+1 212 908 0760

Winnie Fong

North America

Winnie Fong

Business

+1 212 908 9139