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.
Lower expected recovery prospects resulted in a declining weighted average recovery rate (WARR) across Fitch-rated middle market (MM) CLOs in 2Q19, averaging 70.3% in the quarter compared with 71% in 1Q19, according to Fitch Ratings' latest U.S. MM CLO Snapshot.
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.
Fitch Ratings says a breach by a European CLO manager of their transaction's reinvestment criteria underlines the importance of compliance testing in managing operational risk. The manager had failed to comply with the maturity replacement condition, which extended the portfolio's weighted average life (WAL) in a transaction post reinvestment period.
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.
Post-crisis European CLO 'AAAsf' ratings would avoid downgrades, even if faced with stresses similar to those experienced during the height of the financial crisis. Pre-crisis European senior CLO tranches rated 'AAAsf' had a high resistance to downgrade, while post-crisis European CLOs have greater credit enhancement, enhanced structure and increased diversification.
Collateral quality tests remains stable in the European CLOs that we rate while obligor diversification continues to increase, Fitch Ratings says. The number of obligors per CLO averaged 129 as of end-2Q19 and the top 10 exposure fell to 16.6% from 17.9% at end-2Q18.
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.
U.S. broadly syndicated loan (BSL), CLO triple-C (Caa/CCC) concentration limitations, and excess haircuts exposures are not easily comparable or transparent across CLOs due to variety of indenture definitions
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.
Unclear Euribor definitions could overstate the reported weighted average spread (WAS) of European collateral loan obligations (CLOs). Investors should examine the WAS definitions carefully to gain awareness of the possible WAS uplift due to negative Euribor and evaluate the impact of WAS adjustments when comparing CLO transactions.
Total losses on EMEA structured finance (SF) are low and are concentrated in certain crisis-era transactions, Fitch Ratings says in a new report. More than three-quarters of all expected losses have now been realised.
EMEA CLO ratings show high resilience to negative migration in the underlying loan portfolio. Our stress test shows that the CLO rating impact would be limited even if all underlying assets rated 'B-' were downgraded to 'CCC'. The stress scenario is comparable to the aftermath of the global financial crisis in 2008-2009
The number of combined defaults and deferrals for U.S. bank trust preferred securities (TruPS) collateralized debt obligations (CDOs) declined to 8.8% of the original collateral balance of $37.7 billion at the end of first-quarter 2019 (1Q19) from 9.4% at the end of 4Q18
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.
European CLOs are starting to amortise as higher liability spreads make refinancing and resets less attractive. Until recently, liability repayments have been relatively small due to the limited scheduled and unscheduled principal payments of underlying assets.
Competition for collateral continues to persist, translating in compression of the average weighted average spread (WAS) in Fitch-rated U.S. middle market (MM) CLOs and overlap in portfolios of MM and broadly syndicated loan (BSL) CLOs. These and other trends are reported in Fitch's 1Q19 MM Snapshot.
A slowdown in global auto demand is unlikely to have an impact on U.S. CLOs through their auto-related exposure. U.S. broadly syndicated loan (BSL) collateralized loan obligations (CLOs) under Fitch's surveillance are underweighted in their exposure to the auto sector compared to the broader market.
The March TTM US institutional leveraged loan default rate is expected to fall to 1.1% from 1.7% last month – the lowest level since 2011. Fitch Ratings looks at leverage-based sweeps of proceeds from asset sales as one example of recent documentation changes in its latest terms and conditions special report series.
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.
Substantial progress in recent months will better prepare financial markets for the discontinuation of IBOR indices, but transition risks remain, Fitch Ratings says in a new report. Our ratings address the payment of interest (and principal) in accordance with the underlying terms of an obligation and would not be directly affected by transition from one reference rate to another or any accompanying spread adjustment.