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European CLO Performance: An Interactive Look At Exposure To 'B-' Rated Assets

On Dec. 13, 2019, S&P Global Ratings published its quarterly European CLO index publication covering third-quarter 2019 performance, in which we took a look at some of the key metrics behind our ratings on the CLO notes (see "European CLO Performance Index Report Q3 2019").

A recent area of particular concern has been the increasing shift of distribution toward lower ratings (see "To 'B-' Or Not To 'B-'? A CLO Scenario Analysis In Three Acts," published Nov. 26, 2019).

'B-' Trends On Active Deals Since 2013

Source: S&P Global Ratings.
Copyright © 2019 by Standard & Poor's Financial Services LLC. All rights reserved.

In Europe, the Middle East, and Africa, the proportion of speculative-grade issuers rated 'B-' has increased to almost 18% from 9% between fourth-quarter 2013 and third-quarter 2019, which has been largely due to new issuers being rated 'B-' rather than solely due to existing issuers' deteriorating credit quality. This change in rating distribution is also reflected in the concentration of 'B-' rated assets held in European CLOs, which has increased to 18% from 4% on average during the same period, possibly reflecting the different strategies held by collateral managers.

Managers’ Exposure to Assets Rated ‘B-’ in Q3 2019 

Source: S&P Global Ratings.
Copyright © 2019 by Standard & Poor's Financial Services LLC. All rights reserved.

Fundamental concerns related to assets' credit quality and scarcity and challenging arbitrage continue to persist. We expect the 12-month trailing default rate for speculative-grade European corporate issuers to increase to 2.8% by June 2020, from 2.3% in June 2019. We note that the forecast is still below the long-term average default rate of 3.1% and that the economic environment continues to benefit from favorable funding conditions (see "The European Speculative-Grade Corporate Default Rate Is Expected To Reach 2.8% By June 2020," published Sept. 30, 2019).

Transaction Exposure To Assets Rated ‘B-’ In Q3 2019 

Click chart legend to filter by exposure.
Source: S&P Global Ratings.
Copyright © 2019 by Standard & Poor's Financial Services LLC. All rights reserved.

Overall, CLO performance in third quarter was similar to the previous three quarters. Most of the metrics we capture that may affect ratings on the notes showed stable performance. 'AAA' CLO spreads continued to tighten, while spreads on the junior mezzanine tranches widened, leading to the re-introduction of a feature more commonly seen in CLO 1.0 transactions: the turbo redemption. For a description of how it works, see this video.