穆迪-全球-金融市场-贷款抵押债券利息-20180522-24页_1mb

CLO Interest Summary - May 2018

Core Content

This summary provides an analysis of the performance and structural changes in Collateralized Loan Obligations (CLOs) in both the US and Europe, focusing on the impact of declining weighted average recovery rates (WARR), weakening collateral quality, and market trends on CLO trading flexibility and credit risk.

Main Points

Declining WARR and Reduced Trading Flexibility

• WARR Decline: The weighted average recovery rate (WARR) for US and European CLO 2.0s has declined significantly over the past few years, reducing the cushion available for absorbing further collateral deterioration.
• Impact on WARF: Lower WARR levels reduce the ability of CLOs to use excess WARR to offset lower credit quality assets, as measured by weighted average rating factor (WARF).
• CLO Performance Metrics: The median WARR for European CLOs declined by 253 bps, and for US CLOs by 50 bps since January 2016.
• CLO Utilisation of Excess WARR: Around 53% of European CLO 2.0s were using excess WARR to increase WARF covenant levels, while the median utilisation rate was 44%.
• Credit Risk: The erosion of WARR and WARF cushions increases the likelihood of CLOs breaching their collateral quality tests, especially if a significant portion of the portfolio is downgraded.

Credit Quality Deterioration in the Leveraged Loan Universe

• Cov-lite Loans: Covenant-lite (cov-lite) loans have become more prevalent, leading to weaker loan documentation and reduced debt cushions.
• First-lien Leverage: The increase in first-lien leverage has reduced the subordinated debt cushion, increasing the risk of losses for first-lien investors.
• Debt Cushion Trends: In the US, the average debt cushion for first-lien cov-lite loans dropped from 33% pre-crisis to 28% in 2012 and 22% in 2016.
• CLO Cov-lite Limits: CLOs' cov-lite purchase limits have increased significantly, with many now allowing up to 70% of collateral to be cov-lite, compared to 10-40% in early CLO 2.0 vintages and 19% in 2007.

CLO Issuance and Market Dynamics

• European BSL CLO Issuance: Despite a decline in credit quality, European broadly syndicated loan (BSL) CLO issuance remained strong in Q1 2018.
• CLO Performance: The credit quality of existing CLOs, as measured by WARF, deteriorated by 14 points for CLO 2.0s and 1030 points for CLO 1.0s in Q1 2018.
• Default Exposure: The median default exposure remained at 0.0% for both CLO 1.0s and CLO 2.0s, but the proportion of Caa-rated assets increased, indicating a shift toward lower-quality collateral.
• Refinancings and Resets: Refinancings and resets have become important tools for CLO managers to maintain credit support and manage portfolio performance, though they may include lower-quality assets.

Market Outlook and Investor Sentiment

• 2018 Issuance Expectations: There is an expectation of record issuance in 2018 due to improved loan spreads and global investor demand.
• CLO as Permanent Financing: Refinancings and resets are helping CLOs become more of a permanent financing vehicle, though the distinction between transaction types is not clear-cut.
• Investor Flexibility: CLO managers are seeking to increase bond holdings due to better contractual protection against covenant modifications.
• Cov-lite Undercounting: The variety of cov-lite definitions in the market leads to undercounting of cov-lite exposures in CLO portfolios.

Key Information

• WARR and WARF Cushions: Declining WARR and WARF cushions reduce the ability of CLOs to manage collateral quality and absorb further credit deterioration.
• Structural Weakness: CLO documentation has weakened, with more lenient reinvestment criteria and longer weighted average lives (WALs), reducing trading flexibility.
• Market Trends: The shift toward cov-lite loans has influenced CLO collateral composition and risk profiles, with CLOs increasingly including these assets.
• Performance Metrics: The median WARF and WAS for European CLOs declined in February 2018, while Caa holdings and OC ratios also decreased, reflecting a shift in collateral quality and portfolio management.

Conclusion

The global CLO market is facing reduced trading flexibility and increased credit risk due to declining WARR and WARF cushions, driven by the proliferation of cov-lite loans and the weakening of credit quality in the leveraged loan universe. Despite these challenges, European BSL CLO issuance remained strong, and the market is expected to see increased activity in 2018, with refinancings and resets playing a significant role in maintaining credit support and portfolio performance.