RPT-Fitch: European CLO resurgence challenged by regulation
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Jan 23 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings says in a new report that it expects issuance of European collateralised loan obligations (CLO) to continue in 2014. Last year saw EUR7.5bn of European CLOs being issued, consisting of 21 transactions by larger established managers. Issuance for 2014 will be a function of availability of loan collateral, managersa€™ capital reserves to fund the retention stake and the clarification of the treatment of CLOs under the US Volker rule.
Fitch expects the retention stake rule - which requires managers to retain a stake in the CLO whether held in the form of CLO tranches or of equity interest in the underlying CLO portfolio - to be the primary brake on issuance in 2014. The agency estimates that EUR3bn-EUR4bn of capital injections by managers would be necessary to refinance CLO 1.0 transactions. However, Fitch believes that managers are now able to obtain funding for a part of the retention stake if held in the form of rated CLO tranches, in effect leveraging the retention stake, which may help to reduce the capital burden.
Given the limited primary issuance of European leverage loans Fitch expect that collateral for new CLOS will chiefly come from banksa€™ balance sheets and CLO 1.0 deals that will be called. In the latter case Fitch estimates that EUR6bn to EUR11bn could become available for refinancing, potentially funding 15 to 30 CLO 2.0 transactions in the next 18 months.
The report also points out that the CLO market has turned into an investor rather than issuer market. This is reflected in transaction structures. a€œFor example, managers have to manage their portfolios under stricter rules after the end of the reinvestment period compared with CLO 1.0 transactions,a€� says Galen Moloney, Senior Director in Fitcha€™s Structured Credit team. a€œWe do not expect CLO 2.0 structures to change dramatically from those issued to date as long as the investor base remains limited, particularly at the senior level.a€� The report, ''CLO 2.0: Opportunities and Challenges ', is available at 'www.fitchratings.com' or by clicking on the link above.
Link to Fitch Ratings' Report: CLO 2.0: Opportunities and Challenges