穆迪-全球-投资策略-抵押贷款契约（CLO）利率-20180426-19页_1mb

CLO Interest Summary

Core Content

This document provides an analysis of collateralized loan obligations (CLOs), focusing on weakening documentation constraints and their impact on credit quality and risk for noteholders. It outlines the trends and structural changes in CLOs over the past few years, particularly in the context of market conditions and rating methodologies.

Main Points

1. Weakening CLO Documentation Constraints

• CLO documentation constraints have weakened, similar to the trend seen in covenant-lite (cov-lite) loans.
• This trend is driven by market forces such as low interest rates and robust financial valuations.
• The weakening of constraints affects collateral quality tests, asset trading rules, and document amendment provisions.
• While some changes are credit negative, others may provide managerial flexibility to improve performance.

2. Impact on Collateral Quality Tests

• CLOs are increasingly using modifications to collateral quality tests to alter risk profiles.
• Examples include:
  • Distorting the weighted average life (WAL), weighted average rating factor (WARF), weighted average spread (WAS), and weighted average recovery rate (WARR).
  • Overstating WAS by using purchase prices in calculations, which can be credit negative if not compensated by other measures.
  • Understating WAL and WARF, which may allow the exclusion of lower-quality assets.
• Some CLOs allow the purchase of weaker quality assets if the WAL is below a certain threshold.
• CLOs can also refinance senior tranches at lower spreads, enabling the inclusion of lower credit quality assets.

3. Changes to Collateral Composition Constraints

• CLOs are more flexible in terms of collateral composition, including:
  • Credit risk exchanges, where assets are swapped without being subject to collateral quality tests.
  • Allowing assets with maturities beyond CLO notes' legal maturity.
  • Weaker post-reinvestment trading restrictions, such as not stepping down WAL covenants after reinvestment.
  • DDO substitutions, where low-priced assets are sold and replaced with others.
• European CLOs have increased geographic diversification, potentially exposing them to sovereign and foreign exchange risks.

4. Structural Mitigations

• Some CLO structures mitigate the credit risks associated with weaker documentation.
• CLO 2.0s still retain advantages over CLO 1.0s, including:
  • Higher tranche subordination levels.
  • Shorter reinvestment periods, reducing opportunities for par erosion.
  • Restrictions on non-corporate debt, such as structured finance instruments and synthetic securities.

5. Market Pulse and Surveillance Update

• In January 2018, credit quality weakened as defaults increased.
• War-loose CLOs showed worsening WARF and lower WAS levels.
• US CLO 1.0s experienced a 600 bps increase in defaulted holdings, while US CLO 2.0s had a 16 bps increase.
• European CLO 2.0s saw an increase in Caa-rated holdings due to the downgrade of Aenova Holding GmbH to Caa1.
• Cash levels also increased, indicating reinvestment activity.

6. Rating Actions in March 2018

• Moody's upgraded ratings on several CLO tranches, particularly those benefiting from deleveraging and increased OC ratios.
• Downgrades were issued due to par loss, credit deterioration, and covenant breaches.
• Ratings were withdrawn in cases of refinancing, optional redemptions, and full payment of notes.

Key Information

• CLO 2.0s are defined as CLOs issued after the 2008 credit crisis, starting around 2010.
• Cov-lite loans are defined as loans lacking financial maintenance covenants.
• DDO thresholds (deep-discount obligation) are used to determine purchase price limits for assets.
• CLO documentation has become more flexible, with some CLOs allowing managerial discretion in asset selection and collateral quality tests.

Conclusion

The weakening of CLO documentation constraints has introduced new credit risks for noteholders, particularly in the US market. However, CLO 2.0s still offer structural advantages over CLO 1.0s, such as higher subordination levels, shorter reinvestment periods, and more restrictive collateral rules. The market pulse and surveillance update from March 2018 highlight ongoing credit challenges and rating adjustments in response to changing market conditions and portfolio performance.