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European CLOs: Visual Impact Of COVID-19 To The European Portfolios

On March 24, 2020, S&P Global Ratings published “European CLOs: Assessing The Credit Effects Of COVID-19,” which discusses the short-term effect of the COVID-19 pandemic on European CLOs.

We expect a surge in the European speculative-grade corporate default rate to the high single digits over the next 12 months, although the severity will vary significantly by sector and individual credit characteristics. As a result, there could also be an impact on CLOs, which are securities backed by a portfolio of corporate debt, typically senior secured loans made to speculative-grade companies, whose average credit rating is in the 'B' ('B+', 'B', and 'B-') category.


Chart 1: COVID-19 Related Rating Actions On Corporate Issuers In EMEA CLOs

Source: S&P Global Ratings.
Copyright © 2020 by Standard & Poor's Financial Services LLC. All rights reserved.

We have taken negative rating actions on several U.S. and EMEA corporate issuers for reasons related to the spread of COVID-19. In EMEA, 29 speculative-grade issuers were subject to rating actions (change of outlook, CreditWatch Negative placement, downgrade, or a combination of these).

As of March 20, 2020, we have taken negative rating actions, including downgrades, and negative outlooks and CreditWatch placements, on 208 U.S. and EMEA speculative-grade corporate issuers, to which European CLOs are exposed, for reasons related to the spread of COVID-19.

On aggregate, these credits are included in the portfolios of 110 European CLOs that we rate, but only account for about 7% of the total portfolio exposures by notional amount. The chart indicates the presence of these credits in the CLOs portfolios as well the exposure.


Chart 2: Facilities Affected By Covid-19 Related Rating Actions In European CLO Portfolios

Source: S&P Global Ratings.
Copyright © 2020 by Standard & Poor's Financial Services LLC. All rights reserved.

At the same time, not all of the European CLOs have the same exposure to these issuers. The different degrees of exposure among European CLOs represents a set of factors, such as time of CLO issuance, manager strategy, and transaction document covenants, among others.

Almost all of the European CLOs that we rate have some exposure to a corporate issuer that we have recently downgraded due to COVID-19 related stresses, however the scope varies.

Chart 3: European CLO Loan Amounts Exposure By Country

Source: S&P Global Ratings.
Copyright © 2020 by Standard & Poor's Financial Services LLC. All rights reserved.

In aggregate, the universe of European CLOs that we rate is generally well-diversified by issuer, country, and sector, with more than 600 issuers across 27 countries and 60 industries.

The chart is split by outlook and country. Countries that have so far been more affected by the COVID-19 pandemic, like Italy and Spain, have limited exposure: currently, only one credit was located in Spain and none in Italy. On the other hand, the U.K. corporate credits are already facing some of these negative actions.

Chart 4: European CLO Loan Amounts Exposure By Industry

Source: S&P Global Ratings.
Copyright © 2020 by Standard & Poor's Financial Services LLC. All rights reserved.

CLO performance is strongly linked to the performance of the speculative-grade obligors that issue the underlying debt held in the CLO collateral pools. In our view, the structural features of the CLOs and the assumptions underlying our rating methodology would maintain ratings stability even if the underlying collateral experienced a modest increase in corporate downgrades and defaults, which we account for in our current expectations. However, an economic downturn significant enough to produce a sharp increase in negative actions on corporate ratings, or in the leveraged loan default rate, could affect the ratings on some CLO transactions. The chart indicates which industries in CLOs have a larger portion of issuers with negative outlooks, such as specialty retail. In this industry, the amount of notional debt with a negative outlook is greater than that with a stable outlook. Similarly the hotels, restaurant, and leisure industry also displays negative signs, when considering the outlook.