European CLOs in a Post-Pandemic Era: how has the market performed and what is on the horizon?

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Introduction

While 2021 was a record year for collateralised loan obligation (CLO) structures, in terms of new issuances, reset and refinancing activity, recent macroeconomic and geopolitical factors appear to be cooling the market. European tension, inflationary pressures and the impact of more lenient lending criteria throughout the Covid-19 pandemic may affect underlying loan performance and cause some investors to shift to safer credit. The resilience of the CLO 2.0 template and attractiveness of floating rate notes will mitigate the impact on tranche performance and reduce demand shock.

Key Points

  • The rise in origination of weakly rated, covenant-lite (cov-lite) credits in a low interest rate environment throughout 2021 will place pressure on the leveraged loan market and junior CLO tranches.
  • Concern of stagflation in Europe as the Russia-Ukraine conflict develops, is now being priced in to corporate and sovereign credit markets, due to the expectation that a recessionary environment will push investors to less volatile and more liquid assets.
  • Tightening monetary policy will further impact the balance-sheet strength of highly leveraged companies, some of which have been buoyed by fiscal support in recent years, increasing defaults.
  • More stringent collateral quality tests, along with active management, will allow managers to mitigate the impact of market changes.

Documents

EUROPEAN CLOS IN A POST-PANDEMIC ERA: HOW HAS THE MARKET PERFORMED AND WHAT IS ON THE HORIZON?

18 Apr 2022

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