The asset performance of almost 90% of structured finance transactions globally have high or moderate vulnerability to disruptions as a result of the coronavirus and containment efforts. Our report categorizes each sector's asset performance vulnerability to the effects of a temporary coronavirus disruption scenario, including travel restrictions, business and school closures, and a moratorium on large gatherings in major metropolitan areas around the globe.
Fitch Ratings will apply a stress scenario to all CLO portfolios globally for exposure to issuers in industries that have greater vulnerability to disruptions caused by the coronavirus. The agency expects CLO note ratings to be mostly resilient, especially at the senior level, given the limited exposure to these sectors.
Interest payments on structured finance (SF) subordinated notes with weak liquidity provisions may be deferred if there is a high take-up of payment holidays for an extended period due to the coronavirus outbreak, Fitch Ratings says. We expect most governments or lenders to announce some form of payment holiday or forbearance measures for consumer and SME loans.
EMEA CLO note ratings are well-placed to weather a potential downturn as a result of the coronavirus. CLOs have performed well during the benign credit environment of recent years. As a result the vast majority of EMEA CLOs are at or close to their target par with healthy cushions under over-collateralisation (OC) tests.
Some US corporate sectors are more vulnerable to disruptions caused by the global reach of the coronavirus (COVID-19) and the effects on US leveraged loan issuers and subsequently CLOs depend on companies’ exposure to these dynamics. US energy, metals and mining, airlines, travel services and gaming companies’ cash flows are at greater risk relative to other sectors.
A quarter of our EMEA leveraged finance (LevFin) portfolio is exposed to the coronavirus (or COVID-19) spreading in Europe. The majority of these high-yield bond and leveraged loan issuers operate social venues vulnerable to government preventative measures or people avoiding busy spaces.
Some US corporate sectors are more vulnerable to disruptions caused by the global reach of the coronavirus (COVID-19) and the effects on US leveraged loan issuers and subsequently CLOs depend on companies’ exposure to these dynamics.
The materiality of environmental, social and governance (ESG) factors on the ratings of global structured finance transactions, reflected by ESG relevance scores (ESG.RS) of '4' or '5', is greater for older vintage structured finance credits. Pre-financial crisis vintages, originated before 2009, are most influenced by negative ESG factors.
Fitch Ratings says in a new report that Fitch-rated European CLOs have a low exposure to loans and bonds of concern. A default of these loans and bonds of concern would have limited impact on Fitch-rated European CLOs.
U.S. CLOs with broadly syndicated loan portfolios (BSL CLOs) rated by Fitch Ratings logged a second consecutive quarter of net losses along with overcollateralization (OC) cushion contraction. In addition to showing OC and other trends for BSL CLOs that Fitch rates, this most recent quarterly publication presents contributing factors to this OC cushion compression as well as some manager habits with regard to their 'CCC' exposures, including buy and sell activity on certain loans.
U.S. broadly syndicated loan CLOs, U.S. middle-market (MM) CLOs and European CLOs showed some parallels on key trends in 2019, such as an increase in default and 'CCC' exposures, Fitch Ratings says in its latest Global CLO Quarterly. Charts in the publication show also ample overcollateralisation (OC) levels and cushions to key credit quality metrics.
The combined notional of defaults and deferrals for US bank trust preferred securities (TruPS) collateralized debt obligations (CDOs) remains at 7.9% of the original collateral balance of $37.7 billion at the end of the fourth quarter in 2019 (4Q19) compared to the end of 3Q19.
Fitch Ratings is pleased to announce the appointment of Kevin Kendra as its new head of U.S. RMBS and Derek Miller as Fitch's new head of U.S. Structured Credit. Both analysts will report to North American Structured Finance and Covered Bond Group Head Rui Pereira.
Credit quality deteriorated slightly in its rated European CLOs as the average Fitch weighted average rating factor (WARF), average 'CCC' and at-risk portfolio exposure increased over the past quarter. European CLOs have sufficient buffer to withstand credit deterioration, which is underlined by a Stable Rating Outlook for European CLOs and a Stable to Negative Outlook for leveraged loans backing European CLOs.
Fitch Ratings said EMEA SME securitisation in 2019 increased for the second straight year with a total issuance of EUR25.9 billion, versus EUR16.5 million a year ago and comparable to the volume recorded in 2016.
"While it is prudent to prepare for a downturn, this is not what we expect to see in 2020. We are in an elongated credit cycle where U.S. leveraged loan defaults will continue to marginally tick higher and credit quality slightly weaken for the next several years. This exposure in CLOs should remain at a manageable level due to active management and diversification," said Kevin Kendra, Managing Director, Head of U.S. Structured Credit.
Fitch Ratings will require all broadly syndicated loan (BSL) CLOs rated by the agency to include additional asset-specific attributes to reporting requirements in indentures after March 31, 2020. The additional information can be sourced from the respective Fitch rating feeds and includes the Fitch Issuer Default Rating (IDR) Equivalency rating used in its CLO analytics. If a CLO is unable to comply with these requirements, Fitch expects the CLO manager to present a plan for compliance before the Effective Date of the CLO.
Healthcare/Pharma Contribute Most to Concern Loans in U.S. CLOs. Growing outstanding amounts on our Lists of Concern, net downgrade pressure and increased investor skepticism toward lower-rated and aggressive sponsor deals defined second-half 2019, and these themes are likely to shape 2020. Manager experience is viewed as highly important to investors as they consider CLOs.
Fitch Ratings has been recognized as the best rating agency for structured finance at FinanceAsia's annual 2019 achievement awards and was also voted Australian structured finance rating agency of the year by KangaNews. FinanceAsia also named Fitch as the best credit ratings agency for financial institutions and public finance.
Many CLO managers that newly enter the European market were initially active in the U.S. Though Europe is smaller than in the U.S., there are diversification and efficiency benefits from expanding abroad, Fitch Ratings says. Of the 18 entities that issued or announced intent to issue a first post-crisis CLO in Europe since the start of 2018, 10 were firms initially active in the U.S.
Reinvestment periods in US and European CLOs lengthened in 3Q19 from the previous quarter to reach a near post-crisis high, says Fitch Ratings in its latest Global CLO Quarterly report. The longer reinvestment periods have not led to an increased senior spread, as the average 'AAAsf' spread flattened in the U.S. broadly syndicated loan (BSL) CLO market and fell in the European CLO market.
The combined notional of defaults and deferrals for U.S. bank trust preferred securities (TruPS) collateralized debt obligations (CDOs) declined to 7.9% of the original collateral balance of $37.7 billion at the end of the third quarter in 2019 (3Q19) from 8.2% at the end of 2Q19, according to the latest index results published by Fitch Ratings.
Weak exposure in U.S. broadly syndicated loan CLOs increased quarter-on-quarter primarily due to more issuers' loans becoming listed on our Top Loans of Concern (TLoC) list at the end of September compared to June.
Differing investment approaches by middle market (MM) CLO managers resulted in widening performance trends across Fitch-rated MM CLOs in Fitch Ratings' latest U.S. Middle Market Snapshot. Issuance remains robust.
Senior spreads on new issues of European CLOs started to decline for the first time since the beginning of 2018 as 'AAA' spreads averaged 105.9bp over Euribor during 3Q19 versus 111.3bp for 2Q19. 'AAA' spreads for transactions priced in the second half of September 2019 declined further to average 92.8bp.
Fitch Ratings says different features in European CLOs can have an impact on the risk profile of a transaction across the capital structure. From a credit perspective, structural feature remain broadly constant across European CLOs but documentations continue to evolve as the European CLO market continues to grow with record issuance and additional managers entering the market.
Fitch Ratings has observed 10 new managers that have issued broadly syndicated loan (BSL) and middle market (MM) CLOs in the U.S. so far in 2019, the same number of new managers logged in the full years of 2017 and 2018.
Fitch Ratings says social and governance risks have the most impact on its new environmental, social and governance relevance scores for structured finance and covered bonds (SF and CvB) ratings globally. Initial results show on aggregate 21.1% of transactions and programs across SF and CvB asset classes contain contributing ESG factors or credit rating drivers.
We are proud to be the first rating agency to introduce scores to the Structured Finance and Covered Bond market to show the relevance and materiality of ESG to our rating decisions. Our ESG Relevance Scores are integrated into our ABS, CMBS and RMBS transaction reports, and covered bonds program research, to transparently and consistently display the impact of ESG elements on our credit ratings.
U.S. CLOs' rates of amortization post their reinvestment periods (RIPs) vary widely as managers are often able to reinvest heavily. Proceeds ineligible for reinvestment during a CLO's amortization period are generally limited to discretionary sales, scheduled payments (such as loan maturities and amortizations), and sometimes recoveries on defaulted assets.
Industry initiatives and adaptations in market practices continue in anticipation of the discontinuation of IBOR indices. But progress is uneven across jurisdictions and asset classes. For structured finance (SF), like other markets, key uncertainties relating to legacy contracts and transition in consumer products remain.
New environmental, social and governance (ESG) restrictions incorporated in some European CLOs (ESG CLOs) have no credit impact. These ESG CLOs typically restrict the purchase of obligations in specific sectors. In Fitch view, the restrictions currently observed do not materially impact the universe of investible obligations compared with other European CLOs, given the absence of material leveraged loans and high-yield bonds issuance in these restricted sectors.
US collateralized loan obligations (CLOs) have some exposure to pharmaceutical companies that are in the spotlight due to litigation arising from the opioid crisis but diversification and concentration limitations are likely to insulate portfolios from material risk, says Fitch Ratings. Overall, exposure to the pharma sector is relatively small and not all of the issuers in opioid settlement discussions are held within Fitch-rated CLO portfolios.
Fitch Ratings believes that CLOs issued with recommended language for transitioning from LIBOR is a positive for market stability. However, regulatory pressure is likely to be needed for widespread adoption.
Opinion was polarised on how new capital requirements for securitisation products, including CLOs, would affect Japanese investors' US CLO investments; 52% of attendees said it would lower investment, while 48% said it would not have a significant impact.
CLO indentures specify a hierarchy of market value sources that typically starts with a nationally recognized loan pricing service, such as IHS Markit or Loan Pricing Corporation, and then looks to the average price from three independent broker-dealers, or the lower of two, if only two bids are available, or the bid in the case of a sole bid.
Mezzanine investors are facing a more challenging assessment of the risk-return trade-off following the record level of redemptions across Fitch-rated trust preferred (TruPS) CDOs observed in 2018, according to Fitch Ratings in a new report. Fitch believes that additional redemptions will be idiosyncratic in nature and unlikely to continue at the same pace as in the recent past.
U.S. and European CLO issuance rose in 2Q19 from the previous quarter, supported by flexible structures and spread stability. Due to brisk activity in the U.S. in April, 63 new and re-issued CLOs with broadly syndicated loan portfolios (BSL CLOs) priced USD31.2 billion of notes and equity in 2Q19, and a high of 12 middle-market (MM) CLOs with USD6.3 billion were also priced. Europe saw 19 new transactions, bringing the year-to-date issuance to EUR14.7 billion.
While both the leveraged loan and U.S. CLO markets are seeing more late cycle behavior emerging, the make-up of the markets themselves has changed quite radically of late, according to Fitch Ratings in its 2019 Virtual Investor Video Series for Structured Finance.
The average weighted average spread (WAS) for U.S. broadly syndicated loan (BSL) CLOs inched up in the second quarter of 2019, a trend shift from past quarters, Fitch Ratings says in its latest U.S. CLO Index. This supported fewer WAS test failures, which in the past quarter had come from loosening covenant levels.
The combined notional of defaults and deferrals for U.S. bank trust preferred securities (TruPS) collateralized debt obligations (CDOs) declined to 8.2% of the original collateral balance of $37.7 billion at the end of the second quarter in 2019 (2Q19) from 8.8% at the end of 1Q19, according to the latest index results published by Fitch Ratings.
Over the last few months Fitch has been testing the resilience of our portfolio of post-crisis European CLOs against a credit cycle downturn. Senior analysts from Fitch’s structured credit team discussed the topic and gave an insight into the parameters of our tests and the conclusions in this webinar.
Total losses on US and Canadian structured finance (SF) bonds are concentrated in crisis-era transactions (2005-2007 vintages) and primarily consist of losses on US RMBS, Fitch Ratings says in a new report. Losses on SF tranches issued prior to 2009 contribute 99.9% of total SF losses. Approximately 95% of pre-crisis bond issuance is resolved (repaid or loss realized) or withdrawn.
How will U.S. CLOs, asset managers, and the Leveraged Finance markets overall fare under peak cycle conditions and a potentially decelerating economy? Justin Patrie, head of Fitch Wire, leads the discussion in the latest installment of the Late Cycle Roundtable series. Share via LinkedIn
European investment-grade (IG) CLO note ratings would remain broadly resilient to leveraged loan recovery falls by 20%-50%, a significant shock when considering both average and peak historical default rates and the stresses the agency applies in its rating analysis.
US broadly syndicated loan CLO platforms have the most experienced portfolio management teams by proportion of those with long service as compared with US middle market loans and Europe CLO, according to survey responses of over 100 CLO asset managers who participated in the Fitch Ratings 2019 CLO Asset Manager Handbook.
Increasing senior spread on collateralized loan obligation (CLO) notes in the U.S. and Europe has dampened reset and refinancing activity in both markets, Fitch Ratings says in its latest Global CLO Chart Book. New issuance was up slightly in the prior quarter in Europe to EUR6.9 billion in first-quarter 2019 (1Q19), while new and re-issue levels were flat at $26.8 billion in the U.S.
109 CLO managers are profiled in Fitch Ratings’ latest CLO Asset Manager Handbook and accompanying Excel-based data sheet. Profiles include key manager facts such as corporate structure, key personnel, assets under management and the number of CLOs outstanding. The handbook provides profile reports in a standardized manager, providing investors with a consistent framework for evaluating and comparing managers.
Fitch’s Chief Credit Officer, Jeremy Carter, and Group Credit Officer, Andreas Wilgen, discuss the progress which has been made to prepare financial markets for the discontinuation of IBOR indices and highlight the risks which still remain.