TEXT-Fitch:Significant amend and extend activity in CLOs

Thu Nov 29, 2012 6:19am EST

Nov 29 - Fitch Ratings says in its new European leveraged loan CLO tracker report that up to 40% of the CLO portfolio has been subject to amend and extend activity in the past two years.

"While refinancing opportunities for highly leveraged borrowers remain scarce, the maturity wall has been extended and smoothed," says Laurent Chane-Kon, Director in Fitch's European Structured Finance team.

The cumulative default rate observed within CLO portfolio stands at 13.4% and is still below expectations. Although the maturity wall has been smoothed, defaults may still pick up when most loans are due for repayment between 2015 and 2017, and if refinancing options continue to be limited and highly selective. In addition, Fitch expects further writedowns for loan issuers that have previously defaulted on their obligations. The initial debt restructurings, driven by the limited willingness of lenders and CLO manager to accept writedowns, are not sustainable and do not accurately reflect the value of the defaulted debts.

Nonetheless, net losses for European CLOs remain low. Excess spread has enabled transaction to deleverage and reduced losses close to zero. The European CLO sector has continued to perform thanks to efficient structures and lower than expected defaults so far.

CLOs are now reaching the end of their reinvestment period. Reinvestment beyond this period is typically only permitted if the senior notes have maintained their initial rating and if coverage tests are in compliance. Most CLOs that have passed their reinvestment period are deleveraging surprisingly quickly, up to 20% after one year.

US booming issuance contrasts sharply with Europe, which almost come to a standstill. The economic uncertainty in the eurozone, the lack of transparency in the European leveraged loan market and the limited size of the high yield bond market is not supporting a revival of the Europan CLO market.

More detail is available in the November 2012 European Leveraged Loan CLO Tracker data file. The data has been expanded to include further extensive historical performance data enabling a better understanding of transaction

Link to Fitch Ratings' Report: European Leveraged Loan CLO Tracker

performance over time.

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