Collateralized loan obligation (CLO) transactions have been the primary source of new funding for European leveraged loans in recent years. But as many of these loans are set to mature in the near future, a new report by Standard & Poor’s Ratings Services questions whether the CLO market will be around to offer support in refinancing them.
Using collateral portfolio data for 205 European cash flow CLOs at the end of each year between 2008 and 2010, we have found that the vast majority of European CLOs are likely to fall away from the leveraged finance market at the very time the wave of maturing loans crests.
"While the primary reason for this potential fallout is that the majority of European CLOs will reach the end of their reinvestment periods between 2012-2014, there are also several more technical documentation reasons that are likely to limit their ability to reinvest in leveraged loans, in our view. As such, we share the growing industry concern as to whether CLOs can continue to finance either new or maturing leveraged loans in the coming years," says corporate credit analyst, Paul Watters.
Credit analyst Emanuele Tamburrano adds: "The concern is a valid one, in our view. Over the period from 2011 to 2015, EUR69 billion of European CLOs by par amount will have ended their reinvestment periods, while over the same period, up to €61 billion of European leveraged loans held within CLO portfolios will need to be refinanced."
"With the prospect of little-to-moderate new CLO creation and a general paucity of loan and capital market credit in Europe, this could leave many more vulnerable borrowers short in the coming years, possibly leading to a second spike up in leveraged loan defaults in Europe," says credit analyst Sandeep Chana.
