The 2014 vintage U.S. CLOs have accumulated noticeably high cash balances as compared with other vintages with tighter collateral quality tests posing challenges to reinvestment, Fitch Ratings notes in its latest U.S. CLO Index.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.