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Alternative Market Briefing

S&P: European CLOs not immune to effects of Covid-19

Thursday, March 26, 2020

Laxman Pai, Opalesque Asia:

The European collateralized loan obligation (CLO) market, like most other sectors, is not completely resistant to the effects of the COVID-19 pandemic, pointed out a study.

An extended period of stress, brought on by the pandemic, may put downward pressure on European leveraged loan and CLO ratings, according to a new report by S&P Global Ratings.

"In the short term, we do not expect rated European CLO transactions to experience significant downgrades," it said.

Key transaction indicators such as the level of 'CCC' category rated assets, the proportion of defaulted assets, and over-collateralization cushions, suggest transactions are protected from a degree of deterioration in portfolio credit quality.

However, an extended period of stress may put downward pressure on S&P CLO ratings, initially affecting speculative-grade tranches.

"Although economic data is currently limited, our short-term macroeconomic outlook for Europe has deteriorated and we now expect a contraction in Eurozone GDP of 0.5%-1.0% in 2020, revised down from our previous forecast of 0.5% growth," it said.

COVID-19 related disruption will affect economic activity in the first half of the year, with a particularly severe hit in the second quarter as near-lockdown measures adopted across Europe dampen the real economy.

"Considering the speculative-grade corporate rating actions that we have taken since the emergence of COVID-19, several of the affecte......................

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