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Testing the Resilience of European CLOs to a Credit Cycle Downturn

July 25, 2019 at 3pm BST / 4pm CEST

Over the last few months Fitch has been testing the resilience of our portfolio of post-crisis European CLOs against a credit cycle downturn. Comparing our rated portfolio of pre-crisis transactions with those deals rated after 2013 it is clear that all else being equal, the latter would be more resilient to downgrade pressures, if subjected to the same level of underlying defaults.
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European CLOs Resilient to a Credit Cycle Downturn

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 European CLOs

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.

Structured Finance 2000-2018 Issuance Loss Estimates Down

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 Approximately 95% of pre-crisis bond issuance is resolved (repaid or loss realized) or withdrawn. 

2019 Late Cycle Roundtable

What Peak Cycle Conditions and Economic Deceleration Means for U.S. Leveraged Finance

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.
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EU IG CLO Notes Resilient to Recovery Shocks

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.

CLO Indentures Vary the View of 'CCC' Exposure

 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

EMEA CLOs: Limited Selling But Reinvestment To Continue In Downturn

EMEA CLOs are set to continue to reinvest proceeds even during a downturn in the credit cycle but sales of non-distressed assets will be curtailed

Survey Highlights Decades of Experience at CLOs

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 WAS in European CLOs

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. 


EMEA Structured Finance Losses Remain Very Low

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. 

Available On-demand: Fitch Discusses EMEA Structured Finance Losses 2000-2018

EMEA CLOs Largely Resilient to Underlying Asset Downgrades

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

U.S. Bank TruPS CDO Portfolio Notional Continues to Decline in 1Q19

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


Special report on TruPS CDOs

Global CLO Chart Book

Spreads Dampen CLO Reset Activity in Europe and U.S.

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. 

U.S. LevLoan Chart Book

Limited Loan Activity Logged in 1Q2019

U.S. institutional leveraged loan issuance had an anaemic start to the year, with limited refinancing and repricing activity to supplement the new deals coming to market. 

CLO Asset Manager Handbook

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 Start to Amortise as Refinancings, Resets Slow

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.

Fitch Ratings: Collateral Competition Persists; Four New Defaults in U.S. Middle Markets

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.

Auto Sector Downturn Unlikely to Impact U.S. CLOs

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. 


Loan Default Rate Drops, Neiman Debt Exchange, Asset Sale Provisions

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.


IBOR Transition Webinar

Available On-Demand

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.

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IBOR Transition Makes Progress, but Key Risks Unaddressed

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. 


Ben McCarthy


Ben McCarthy


+61 2 8256 0388

Matthias Neugebauer


Matthias Neugebauer


+44 20 3530 1099

Kevin Kendra

North America

Kevin Kendra


+1 212 908 0760

Winnie Fong

North America

Winnie Fong


+1 212 908 9139

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