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CLO Interest Summary - October 2017

Core Content

This document provides an analysis of the credit quality and market trends for Collateralized Loan Obligations (CLOs) and speculative-grade nonfinancial corporates in Europe. It includes insights into the performance of specific industries, such as telecommunications, media, chemicals, gaming, and manufacturing, as well as the credit risk and rating outlooks for key companies within these sectors.

Main Points

CLO 2.0 in Europe

• TMBS Industry Exposure: The telecommunications and media (broadcast & subscription) industries (TMBS) are the second-largest industry exposure among European CLO 2.0s, representing 12.4% of the collateral or €5.8 billion.
• Concentration of Exposure: The exposure is highly concentrated, with the top 10 issuers accounting for 78% of the total TMBS exposure.
• Key Issuers: Liberty Global and Altice Luxembourg SA account for 35% of the TMBS exposure.
• Credit Quality: TMBS issuers have better credit quality than the average CLO-held issuer, with a weighted average rating factor (WARF) of 2441, better than the overall European CLO 2.0 median WARF of 2703.
• Outlook: The outlook for the TMBS sector is stable, with a 12-month speculative-grade default rate expected to remain below 1%.

Revenue and Growth Trends

• Revenue Growth: Revenue growth for both telecom and cable sectors in Europe is expected to remain low in 2017, around 1% to 2%, due to increased competition and operational challenges.
• Convergence of Offerings: The offerings of telecom and cable companies have converged, especially in the areas of television, broadband, and telephony.
• Market Challenges: The Netherlands, Switzerland, the UK, Belgium, and France are particularly competitive markets.
• Impact of M&A and Capex: Companies are focusing on M&A and network upgrades, which may increase competition and capex.

Key Credit Metrics

• Leverage and Coverage: The average leverage for TMBS issuers is high, with many operating near or above the Ba3 rating threshold.
• Financial Policy: Some companies, like Liberty Global, maintain a leverage policy between 4.0x and 5.0x net debt/EBITDA.
• Operational Pressures: Companies such as UPC and VodafoneZiggo face negative outlooks due to high leverage and weak operating performance.

Key Information

CLO 2.0 Overview

• The CLO/Structured Credit Group at Moody's is the leading authority for credit ratings and research on CLOs and the structured credit market.
• The group uses its extensive experience in bank loans and high yield, as well as default studies, to provide accurate rating methodologies.

Speculative-grade Nonfinancial Corporates

• The report outlines the key credit trends and rating positioning for the largest European speculative-grade sectors.
• It includes detailed analysis of the chemical, gaming, and manufacturing industries.

Chemical Industry

• EBITDA is expected to peak by the end of 2017 and then gradually soften in 2018.
• The sector benefits from better-than-expected global growth and a stable operating environment.
• Companies are supported by acquisitions, cost-cutting, and improved pricing environments.

Gaming Industry

• Regulatory changes and tax increases are expected to constrain growth for the next 12-18 months.
• Online gambling is projected to grow, primarily through the mobile channel and due to changing social habits.
• Consolidation is expected to continue as companies seek scale and product diversification.

Manufacturing Industry

• European manufacturers are showing signs of improvement, with PMI surveys indicating upward momentum in Europe, the US, and China.
• However, uncertainty over China's growth and the strong euro pose challenges.
• Companies are focusing on improving operational efficiency and managing leverage.

Key Figures and Tables

• Exhibit 1: Telecom and cable organic revenue growth will converge at around 1% to 2% in 2017.
• Exhibit 2: TMBS issuers represent 12.4% of CLO 2.0 collateral.
• Exhibit 3: The top 10 TMBS issuers account for 78% of total exposure.
• Exhibit 4: Key credit metrics for Liberty's subsidiaries are presented, highlighting their financial positions and rating outlooks.
• Exhibit 5: The rating methodology grid for the global pay television sector is provided, showing how ratings are determined based on various financial and operational factors.

Conclusion

The TMBS sector in Europe, particularly telecom and cable companies, faces competitive pressures and operational challenges, but maintains above-average credit quality. Despite this, the outlook remains stable, and default risk is expected to stay low. The report also highlights the broader credit trends across other European sectors, including chemicals, gaming, and manufacturing, and provides detailed insights into the financial health and rating positioning of key companies.