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European CLOs manage B- exposure as big downgrades weigh on triple-C buckets
Sam Robinson
•10 min read
European CLOs overall have lower triple-C buckets than their US counterparts, and there’s cautious optimism that recent trade war volatility is likely to decouple the US and European macroeconomic picture, exacerbating the gap in Europe’s favour.
That’s the good news out the way. On the other hand, the tariff picture remains uncertain, single-B minus levels in portfolios remain high, and as always there’s never quite enough leveraged loan supply to satisfy CLO managers’ demand.
Our dataset of reinvesting European CLOs (see below for our complete methodology) shows an average triple-C bucket of 4.9%, and average single-B minus levels of 33.2%. This compares to 5% triple-Cs in the US, although single-Bs only amount to 29.8%.
Relatively few deals in Europe are breaching their triple-C buckets — only 3.8% (or, 13 out of 342) of the deals in our dataset — and only one deal, Invesco Euro CLO II, was breaching an OC test as of the most recent available report.
On the face of it, European CLOs seem to be reasonably well-positioned. But single-B minus levels are elevated compared to historical levels, and have been so for a considerable period of time.
“There was a clear step-up in B- exposure pre- and post-Covid, rising from mid-teens in late 2019 to over 25% shortly after the pandemic,” said Rebecca Mun, director of European structured credit at S&P.
Single-B minus levels have been relatively stable since then, added Mun, and has actually declined by around 2% over the past three months.
“This is partly due to a rotation into higher-quality assets, but also because of an increase in triple-C and non-performing assets,” says Mun.
Below we’ll consider a breakdown of triple-C and single-B minus levels by manager, as well as looking at the downgrade outlook for the rest of the year.
