STRUCTURED FINANCE RESEARCH
European CLO Performance Index Report Q2 2013: Issuance Continues To Gain Momentum
Primary Credit Analyst: Wayne OGrady, London (44) 20-7176-3496; Wayne_OGrady@[Link] Secondary Contacts: Emanuele Tamburrano, London (44) 20-7176-3825; [Link]@[Link] Sandeep Chana, London (44) 20-7176-3923; sandeep_chana@[Link] Matthew Jones, London (44) 20-7176-3591; matthew_jones@[Link] Research Contributor: Rakshadevi S Tawde, Mumbai; rakshadevi_tawde@[Link]
Table Of Contents
'CCC' Rated Assets Defaulted Assets Senior OC Ratios Subordinate OC Ratios Notes Related Criteria And Research
[Link]/RATINGSDIRECT
AUGUST 2, 2013 1
1172311 | 301112013
European CLO Performance Index Report Q2 2013: Issuance Continues To Gain Momentum
The momentum that Standard & Poor's Ratings Services reported for the first quarter of 2013 has continued throughout the second quarter. This is despite renewed concerns about how collateralized loan obligations (CLOs) comply with risk retention rules following the publication of the European Banking Authority's consultation paper on the new Capital Requirements Regulation. So far in 2013, 10 European CLOs have priced, bringing total issuance for the year to 3.4 billion. European CLO issuance this year has therefore already exceeded the majority of observers' expectations. In addition, we estimate that the market will see at least another 1.4 billion of new European CLO issuance in the third quarter of 2013. This figure, however, is small compared with the overall size of the European leveraged loan market. Furthermore, many outstanding CLOs are now or very soon to be beyond their reinvestment period. In our view therefore, despite 2013's new issuance levels being a very positive signal, CLO issuance still has some way to go before it can provide a very meaningful financing solution for the European speculative grade-corporate market. Overview The momentum that we reported for the first quarter of 2013 has continued throughout the second quarter. The percentage of 'CCC' rated assets increased for all of the vintages tracked in our European CLO performance index. The 2004, 2005, and 2008 European CLO cohorts reported increases in the percentage of defaulted assets. The senior OC ratios increased across all of the vintages tracked in our European CLO performance index. The subordinate OC ratios increased for four of the vintages tracked in our European CLO performance index. Only the 2008 vintage reported a decrease.
Due to the timing of transaction trustee reports, our Q2 2013 data take into account March 2013, April 2013, and May 2013. For more information about our European CLO Performance Index Report, see "Notes" and "Related Criteria And Research". The CLOs in our European CLO performance index are typically invested in speculative-grade corporate debt in Western Europe. These corporate borrowers are typically rated in the 'B' rating category. Although there tends to be some overlap in European CLO portfolios, the collateral quality between certain vintages of European CLOs has differed. As of the end of May 2013, the 2007 vintage appears to have the highest collateral quality in terms of underlying asset ratings. For example, only 7% of the asset portfolio of the 2007 European CLOs tracked in our index is rated below 'B-'. This compares favorably with the 17.72% (by notional amount) of assets rated below 'B-' in the 2004 European CLO vintage. In addition, the 2007 vintage has more assets rated 'BB-' or above than any other vintage. Chart 1 indicates that the more recent the vintage, the higher the collateral quality. In our opinion, one explanation for
[Link]/RATINGSDIRECT
AUGUST 2, 2013 2
1172311 | 301112013
European CLO Performance Index Report Q2 2013: Issuance Continues To Gain Momentum
this trend is that that the 2004 vintage CLOs are furthest beyond their reinvestment period. Therefore, the portfolios have been static for a longer period of time and less actively managed than the more recent transactions, some of which are still capable of reinvestment. In addition, given the fact that the 2004 deals are further into their amortization period, these CLOs will have redeemed further than later vintages that may have just recently entered the amortization phase or are still within the reinvestment period. This means that for these transactions, the overall collateral portfolios will be smaller. However, the proceeds used to redeem CLO notes may have come from higher quality credits that have been able to refinance rather than lower rated obligors. This would lead to a higher percentage of lower rated assets in older deals. The 2008 vintage is the only vintage that does not follow this trendits collateral quality by rating is lower than the 2007 vintage. However, the 2008 vintage mostly comprises balance sheet CLOs rather than the earlier arbitrage CLOs. We can therefore view it as an outlier.
Chart 1
Unsurprisingly, European CLOs are predominantly invested in loans to borrowers operating in the U.K., Germany, and France. Borrowers from these three countries make up 57.8% of collateral portfolios in European CLOs.
[Link]/RATINGSDIRECT
AUGUST 2, 2013 3
1172311 | 301112013
European CLO Performance Index Report Q2 2013: Issuance Continues To Gain Momentum
Table 1
Collateral Distribution By Country
Country U.K. France Germany U.S. Spain The Netherlands Italy Others % of European CLO portfolios 22.40 18.90 16.40 11.80 8.50 7.80 3.30 10.90
Chart 2
Business equipment and services industry borrowers represent 11.22% of the notional amount of European CLO collateral pools, making it the largest industry in which European CLOs are invested. Healthcare, cable and satellite television, and telecommunications are among other heavily featured industries.
[Link]/RATINGSDIRECT
AUGUST 2, 2013 4
1172311 | 301112013
European CLO Performance Index Report Q2 2013: Issuance Continues To Gain Momentum
Table 2
Collateral Distribution By Industry
Industry Business equipment and services Health care Cable and satellite television Telecommunications Retailers (except food and drug) Building and development Food service Publishing Chemicals and plastics Leisure goods/activities/movies Others % of European CLO portfolios 11.22 9.10 7.40 7.08 6.71 4.76 4.76 4.66 4.44 3.66 36.22
Chart 3
[Link]/RATINGSDIRECT
AUGUST 2, 2013 5
1172311 | 301112013
European CLO Performance Index Report Q2 2013: Issuance Continues To Gain Momentum
'CCC' Rated Assets
'CCC' rated assets are an important measure of European CLO performance as an increase in 'CCC' rated assets can indicate a reduction in the credit quality of the collateral portfolio. The level of 'CCC' assets can also have the effect of reducing overcollateralization (OC) test results as 'CCC' rated assets may not be carried at their full par value. From February 2013 to May 2013, the percentage of assets rated in the 'CCC' category ('CCC+', 'CCC', or 'CCC-') increased for all European CLO cohorts(see chart 1). By vintage, the reported level of 'CCC' rated assets in European cash flow CLOs, as a percentage of total assets in May 2013, was as follows: 2004 vintage CLOs: 13.61% of total assets (up from 10.74% in February 2013); 2005 vintage CLOs: 9.56% of total assets (up from 7.02% in February 2013); 2006 vintage CLOs: 6.47% of total assets (up from 4.97% in February 2013); 2007 vintage CLOs: 5.50% of total assets (up from 4.39% in February 2013); and 2008 vintage CLOs: 7.99% of total assets (up from 6.97% in February 2013).
Chart 4
[Link]/RATINGSDIRECT
AUGUST 2, 2013 6
1172311 | 301112013
European CLO Performance Index Report Q2 2013: Issuance Continues To Gain Momentum
Defaulted Assets
Defaulted assets are a key indicator of CLO performance as a defaulted asset may result in a loss of principal to the CLO and a corresponding decline in credit enhancement. From February 2013 to May 2013, the percentage of defaulted assets (i.e., assets from obligors rated 'CC', 'C', 'SD' [selective default], or 'D') in collateral portfolios increased for three European CLO cohorts: 2004, 2005, and 2008 (see chart 2). As of May 2013, the percentage of defaulted assets in each underlying collateral portfolio was as follows: 2004 vintage CLOs: 4.11% of total assets (up from 3.49% in February 2013); 2005 vintage CLOs: 2.72% of total assets (up from 1.83% in February 2013); 2006 vintage CLOs: 2.33% of total assets (unchanged from 2.33% in February 2013); 2007 vintage CLOs: 1.51% of total assets (down from 1.69% in February 2013); and 2008 vintage CLOs: 1.15% of total assets (up from 0.87% in February 2013).
Chart 5
[Link]/RATINGSDIRECT
AUGUST 2, 2013 7
1172311 | 301112013
European CLO Performance Index Report Q2 2013: Issuance Continues To Gain Momentum
Senior OC Ratios
The senior OC ratio test is a par value test to protect senior noteholders. Declines in the senior OC ratio test results can indicate decreasing credit quality of the CLO. The senior OC ratio test cushions signaled improved performance (based on transaction trustee reports) across European CLO cohorts since February 2013. The cushions increased for all cohorts included in our index (see chart 3). The senior OC ratio test cushions (based on reported information) as of May 2013 were as follows: 2004 vintage CLOs: 43.62% of total assets (up from 36.49% in February 2013); 2005 vintage CLOs: 21.95% of total assets (up from 19.04% in February 2013); 2006 vintage CLOs: 16.82% of total assets (up from 14.51% in February 2013); 2007 vintage CLOs: 14.54% of total assets (up from 13.3% in February 2013); and 2008 vintage CLOs: 36.54% of total assets (up from 34.82% in February 2013).
Chart 6
[Link]/RATINGSDIRECT
AUGUST 2, 2013 8
1172311 | 301112013
European CLO Performance Index Report Q2 2013: Issuance Continues To Gain Momentum
Subordinate OC Ratios
The subordinate OC ratio test is the par value test for the junior notes in the CLO. Failure to satisfy this test would cause interest and principal to be redirected to pay down the most senior class of notes until the test is satisfied. The subordinate OC ratio test cushions also showed generally improved performance trends in the three months covered by this report (see chart 4). Only one of the European CLO cohorts reported a decrease in the subordinate OC test cushions. As of February 2013, the subordinate OC ratio test cushions (based on reported information) were as follows: 2004 vintage CLOs: -2.71% of total assets (up from -2.75% in February 2013); 2005 vintage CLOs: 0.89% of total assets (up from 0.79% in February 2013); 2006 vintage CLOs: 0.64% of total assets (up from 0.60% in February 2013); 2007 vintage CLOs: 1.05% of total assets (up from 0.71% in February 2013); and 2008 vintage CLOs: 2.62% of total assets (down from 3.46% in February 2013).
Chart 7
[Link]/RATINGSDIRECT
AUGUST 2, 2013 9
1172311 | 301112013
European CLO Performance Index Report Q2 2013: Issuance Continues To Gain Momentum
Notes
For specific definitions of the performance fields used in this report, see "Glossary Of Cash Flow CLO Performance Index Fields," published on Jan. 30, 2009. For the list of transactions this report tracks, see "List Of European CLO Transactions Included In CLO Performance Index Report (As Of February 2013)," published on Feb. 13, 2013. Our European CLO Performance Index Report provides aggregate performance statistics across most of our rated European cash flow CLO transactions backed primarily by corporate loans. We provide this information to help market participants track the overall performance of European cash flow CLO transactions and to benchmark the performance of the transactions they follow against the performance of cohorts of similar transactions. Our quarterly European CLO Index Report highlights what we view as a number of key risk areas for the transactions, and which we use as part of our analysis of the credit quality of securitized portfolios and of the transactions' payment structure and cash flow mechanics. These include rating migration within the underlying collateral portfolios, as well as other information relevant to the sector. We divide the performance information in the CLO indexes into five cohorts, each containing data for most of the European CLO transactions we rated and issued in a specific vintage year from 2004 through 2008. We collect the performance information from transaction-level performance data in our collateralized debt obligation (CDO) surveillance databases. Information prior to the most recent 12 months is available on CDO Interface, Standard & Poor's Web-based portal for CDO performance information, at [Link]. To generate, view, and download data from the CDO indexes, log onto CDO Interface, and then select the "Indexes" tab.
Related Criteria And Research
Presale: Ares European CLO VI B.V., July 25, 2013 Presale: Jubilee CLO 2013-X B.V., July 12, 2013 New Issue: GoldenTree Credit Opportunities European CLO 2013-1 B.V., July 11, 2013 New Issue: Carlyle Global Market Strategies Euro CLO 2013-1 B.V., June 17, 2013 New Issue: Grand Harbour I B.V., June 5, 2013 European CLO Performance Index Report Q4 2012: Upgrades Outnumbered Downgrades By Seven To One In 2012 Due To Performance, Feb. 13, 2013 List Of European CLO Transactions Included In CLO Performance Index Report (As Of February 2013), Feb. 13, 2013 Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs, Sept. 17, 2009 Glossary Of Cash Flow CLO Performance Index Fields, Jan. 30, 2009
Additional Contact: Structured Finance Europe; StructuredFinanceEurope@[Link]
[Link]/RATINGSDIRECT
AUGUST 2, 2013 10
1172311 | 301112013
Copyright 2013 by Standard & Poor's Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, [Link] (free of charge), and [Link] and [Link] (subscription) and [Link] (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at [Link]/usratingsfees.
[Link]/RATINGSDIRECT
AUGUST 2, 2013 11
1172311 | 301112013