20140124-穆迪服务-Moody_s-CLO+Interest-140120_32页_1mb

CLOInterest - January Edition Summary

Core Content

This edition of CLOInterest provides an in-depth analysis of the performance and credit quality of Collateralized Loan Obligations (CLOs) and related structured credit instruments, focusing on the impact of second-lien loan recoveries, redemption trends, and regulatory changes in China.

Main Points

1. Second-Lien Loan Recovery Rates and Credit Impact

• Second-lien recovery rates are expected to decline due to their position in corporate capital structures, where they are typically the most subordinated debt.
• The average recovery rate for defaulted second-lien debt from 1988 to 2013 was 52%, significantly lower than the 90% for first-lien loans.
• In simple structures, the recovery rate for second-lien debt is 36%, while in complex structures, it is 62%. However, both types are expected to see a decline in recovery rates.
• Moody's LGD assessments show that the expected recovery rate for second-lien debt is 22% for simple structures and 44% for complex structures, with an overall expected rate of 25%.
• US High-Yield CLOs have minimal exposure to second-lien loans, with an average of 2.8% of total par, which limits the credit impact of lower recovery rates.

2. Redemption Trends in CLOs

• Optional redemptions of CLO 1.0 deals are expected to rise in 2014, particularly for 2005-07 vintage deals, due to increased funding costs and lower equity returns.
• CLO 2.0 redemptions will be few, as investors prefer the individual tranche refinancing features.
• 2004 vintage CLOs were the most heavily redeemed in 2013, with 80% of 2005 vintage deals and 90% of 2006 and 2007 vintages still outstanding.
• CLOs with high over-collateralization (OC) and cost of funding are more likely to be redeemed.
• Investors tend to call CLO 1.0 deals slightly more than two years after the end of their reinvestment periods, which are usually five to seven years.

3. China's Updated Risk Retention Rule

• On 31 December 2013, China updated its 5% risk retention rule to include non-equity tranches in securitization transactions.
• This change is credit positive for securitization investors, as it aligns the interests of originators and investors better.
• Key features of the updated rule:
  • Originators must retain at least 5% of all tranches.
  • Retained ratios should match the issued ratios for non-equity tranches.
  • The retention period should be at least the legal final maturity of the notes.
• The update reduces risk appetite of originators, as they are incentivized to monitor securitization programs and avoid excessively risky assets.

Key Information

Performance Highlights

• US and European CLO credit quality remained stable in October 2013.
• CLO cash holdings continued to grow, driven by amortization and prepayments.
• European CLO OC ratios increased, reaching a median of 132.86% in October 2013.
• Pre-crisis US CLO weighted average spreads (WAS) declined to 3.50%, the lowest since April 2012.
• Default levels remained low, consistent with a benign default environment for global speculative grade loans.

Rating Surveillance Updates

• In November and December, 113 tranches in 38 US CLOs were upgraded, with an average of 1.7 notches.
• Upgrades were driven by deleveraging and improvement in OC ratios.
• Three tranches in two transactions were downgraded due to deteriorated WARF and increased long-dated assets.
• Eight tranches in four US SME CLOs were upgraded, with an average of 2.8 notches.
• 85 tranches in 35 European CLOs were upgraded, with an average of 2.2 notches.
• Deleveraging and high prepayment rates on leveraged loans were key drivers of the upgrades in European CLOs.

Conclusion

This edition highlights the declining recovery rates of second-lien loans, which are credit negative but have limited impact on US high-yield CLOs due to their minimal exposure. It also discusses the redemption trends in CLOs, particularly the rise in redemptions for 2005-07 vintages and the limited redemptions for CLO 2.0 deals. Additionally, it emphasizes the credit-positive effect of China's updated risk retention rule, which improves alignment between originators and investors, and the stable credit quality of CLOs in both the US and Europe, with increased OC ratios and reduced default rates.