Euro CLOs steady compared to dollar tranches; CBO/CDO/CLOs soften across capital stack

By Cristal Cody

Tupelo, Miss., May 7 – Ratings downgrades continued on Thursday with Fitch Ratings downgrading or placing on negative outlook notes from several euro-denominated CLOs.

European CLOs have seen fewer downgrades compared to dollar-denominated broadly syndicated offerings since March.

Euro-denominated CLOs have “fared much better” with no euro CLOs failing coverage tests, Wells Fargo Securities, LLC analysts said in a report on Thursday.

The average change in the overcollateralization cushion for euro CLOs was minus 22 basis points from an average March cushion of 428 bps, according to the report.

“Approximately 29% of euro CLOs saw CCC baskets rise to greater than 7.5%, while 25% had Caa holdings exceed 7.5% in April,” the analysts said.

About 15% of U.S. CLOs are failing an OC test with most of the stress on coverage tests concentrated in amortizing and short CLOs.

“Almost 60% of the reporting BSL CLOs breached the CCC limit of 7.5% in April; just over 10% breached the Caa limit of 7.5%,” the analysts said.

The average U.S. BSL CLO saw a 114 bps drop in minimum OC cushion in April from an average 394 bps of cushion, according to the report.

“Despite comprising only 19% of the broadly syndicated loan CLO market, over half of OC test failures are from CLOs past the reinvestment period or ending reinvestment in 2020,” the Wells Fargo analysts said. “Only 21% of BSL CLOs failing an OC test end reinvestment after 2022.”

New issuance remains light on the pandemic market volatility with more than $20 billion of dollar-denominated broadly syndicated CLOs priced so far this year.

Lower-rated paper active

Meanwhile, secondary market volume declined to $331.38 million on Wednesday in investment-grade CBO/CDO/CLO paper, while volume in lower-rated securities increased to $204.75 million, according to Trace data.

Trading volume in high-grade issues totaled $445.14 million on Tuesday and $478.51 million on Monday, while non-high-grade secondary market volume totaled $115.31 million on Tuesday and $120.84 million on Monday.

Prices softened across the capital stack for a second session on Wednesday.

High-grade securities were traded at an average 89.60 on Wednesday, down from 92.10 on Tuesday and 94.10 on Monday.

Average prices for the lower-rated issues declined to 65.30 on Wednesday from 68.50 on Tuesday and 73.80 on Monday.

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