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CLO & Structured Credit

Global Home > CLO & Structured Credit
US LEVERAGED FINANCE AND CLO WEEKLY

Increase in Incremental Loans, Inaugural Global CLO Chart Book, Muted Primary Market

Average loan prices rebounded from December’s market sell off, having recovered to a 96.89 average bid in February, up from 95.01 in December. If the new-issue loan market remains weak, incremental loan volume may remain strong. U.S. and European CLOs have material differences in terms of geographic diversity and regulation but there are many similarities in trends and metrics.

Global CLO Chart Book

High Issuance, Converging Credit Enhancement Observed

Broadly syndicated loan (BSL), middle market (MM) and European (EU) CLO issuance was strong in 2018, with average 'AAAsf' credit enhancement (CE) levels in U.S. BSL CLOs converging with those of European CLO, according to Fitch Ratings' inaugural Global CLO Chart Book. There is more dispersion in CE levels for U.S. BSL CLOs, and they have longer reinvestment periods on average than CLOs in Europe. 
 

Fundamentals Support Stable 2019 Outlook for European CLOs

Fitch Ratings says it expects a stable outlook for European CLOs in 2019 based on strong fundamentals after they ended 2018 on a strong note, with record issuance and robust performance. 

U.S. Bank TruPS CDO Portfolio Notional Continues to Decline in 4Q18

The number of combined defaults and deferrals for U.S. bank trust preferred securities (TruPS) collateralized debt obligations (CDOs) declined to 10.7% of the original collateral balance of $37.7 billion at the end of fourth-quarter 2018 (4Q18) from 11.1% at the end of 3Q18, according to the latest index results published by Fitch Ratings.

Stable Performance of U.S. MM CLOs Persists Through End of 2018

Fitch-rated middle market (MM) CLOs continued to show stable performance during 4Q18, according to a new report by Fitch Ratings. Exposure to defaults remained low, with only one new default in the quarter, held by two MM CLOs. 
 

U.S. CLO Index: Collateral Test Failures Down; WAS Still Stable in Q4

Broadly syndicated loan CLOs under surveillance posted improvement in meeting collateral quality tests in fourth-quarter 2018, says Fitch Ratings in its most recent CLO Index report. Weighted average spread (WAS) stabilization continued throughout the second half of 2018 while the weighted average life (WAL) metric was also stable. 

Topics in Leveraged Loans and CLOs

Fitch Ratings sponsored and participated in a variety of conferences for broadly syndicated loan (BSL), middle market (MM) and collateralized loan obligation (CLO) participants in September through November. Venues included New York and Los Angeles in the U.S. and Tokyo, Japan and Seoul, Korea in the Asia Pacific region. This research takes up some of the most commonly discussed themes and provides Fitch’s views on these subjects.

What Investors Want to Know: Topics in Leveraged Loans and CLOs

Fitch Ratings sponsored and participated in a variety of conferences for broadly syndicated loan (BSL), middle market (MM) and collateralized loan obligation (CLO) participants in September through November. Venues included New York and Los Angeles in the U.S. and Tokyo, Japan and Seoul, Korea in the Asia Pacific region. This research takes up some of the most commonly discussed themes and provides Fitch’s views on these subjects.

Lev Loans and CLO Investors Focused on Downturn, Regulations and Docs

As 2018 comes to a close, leveraged loan and CLO investors are primarily focused on the economic and credit cycle, the time till the next downturn, the effects of regulation and looser documentation, Fitch Ratings says in a report about recently attended conferences.

Outlooks 2019

Global CLO and Leveraged Loans

"Late cycle behavior apparent in loan documentation and demand-driven financing to lower-rated leveraged loan issuers could pressure portfolio credit quality," said Managing Director Kevin Kendra. "However, we are projecting another year of low defaults." Fitch's year-end 2019 default rate for leveraged loans is 1.5%. 

U.S. CLO Interest Coverage Under Pressure

Interest coverage (IC) for U.S. broadly syndicated loan (BSL) collateralized loan obligations (CLOs) has eroded significantly in recent times, Fitch Ratings says. The trend has affected even those managers who preserved weighted average spread (WAS) at stable levels.

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. It is unlikely that Fitch would assign 'AAAsf' ratings to a structure with un-mitigated concentration risk.

 

Related Content:

Fitch Ratings U.S. CLO Index

Portfolio Spreads More Stable in Q3

The average weighted average spread (WAS) for broadly syndicated loan (BSL) collateralized loan obligations (CLOs) stabilized in third-quarter 2018, according to our latest U.S. CLO Index. The index covers the period to the end of September 2018. WAS averaged 3.46% at the end of September 2018, 1 bp lower than the average in the previous quarterly Index and the slowest periodic decline since June 2016.

Outlook 2019

Late-Cycle Risk Grows for NA Structured Finance in 2019

The structured finance markets in North America are positioned for another stable year in 2019; however, Fitch Ratings' outlook report points to several noteworthy external factors investors should consider.

Investors Push Back on Weaker Terms in European CLOs

Investors continue to push back on weaker terms in European collateralised loan obligation (CLO) documentation as the market reaches a post-crisis high, Fitch Ratings says in a new report.

Credit Positive Changes in European CLO Documents

Recent changes to EMEA CLO documentation are credit positive, says Fitch Ratings. Over the past nine months, EMEA CLO documentation has become more restrictive for the manager in terms of reinvestment conditions, when collateral quality tests would fail.

CLO Eligibility Breaches Highlight Operational Risk

European CLO managers have inadvertently purchased ineligible assets in a small number of transactions recently. Exposure to ineligible assets has not been large enough to materially impact transaction performance, and in conversations with Fitch, the relevant managers have committed to take remedial action by selling the assets and reviewing their processes.

Snr Secured Definitions May Change CLO Recovery Expectations

Recovery prospects could fall for European CLOs if revolving credit facility (RCF) limits used in the definition of senior secured obligations rise, Fitch Ratings says. RCF size is reflected in our asset-specific recovery ratings and estimates and may lead to adjustments to our standard recovery rate assumptions. 

European CLO Issuance at Post-Crisis High; Collateral Quality Tests Continue Stabilising

Eighteen European CLOs issued EUR7.5 billion of notes and equity in 3Q18. Year-to-date issuance reached EUR20.8 billion from 50 transactions at end-3Q18, compared with EUR20.1 billion and 49 transactions for the whole of 2017. CLO senior spreads continued to widen during the quarter and averaged 91.6bp. 

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. 

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

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