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Euro loan refi wave costs Accunia a notch in CLO mezz ratings

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S&P Global Ratings downgraded one of the riskier tranches of a 2016-vintage European collateralized loan obligation Thursday, citing a decline in the weighted average spread on the loans in the underlying portfolio.

The London office of the rating agency cut €27.75 million Class E notes on the €398.9 million Accunia CLO 1 by one notch, to BB- from BB. The revolving-pool CLO was the debut issue in August 2016 by Denmark-based Accunia Credit Management Fondsmæglerselskab A/S.

The new lower rating reflects a deterioration of the weighted average rating of the pool's underlying loan and bond assets as well as a "falling" WA spread, S&P stated in a press release.

“The fall in WAS is mainly driven by spread tightening and repricing activity on the underlying loans, a trend we have observed in other CLO transactions in the same vintage,” according to the S&P release.

The agency affirmed the ratings of the other tranches in the transaction, including the triple-A notes that pay a rate of 143 basis points over the negative three-month Euribor rate.

Excluding the benefit of Euribor floors, the weighted average spread between the underlying loan and bond proceeds with the cost of note liabilities on the portfolio had dropped to 3.92% from 4.29%, the report stated.

The Class E notes pay a 7% rate.

Moody’s Investors Service also rated the deal in 2016, and maintains a Ba2 rating on the E notes in the deal. The Ba2 is equivalent to S&P’s BB rating, as both grades are two steps below each agency’s lowest investment-grade level.

Accunia, which closed in August 2016, is still within a two-year non-call window that complicates its ability to reprice rates paid to either senior or junior noteholders. A repricing after just one year would require a make-whole payment to AAA investors, negating any bottom-line improvement from new lower rates.

The downgrade could have been more severe. The deterioration in the spreads and ratings factor of the portfolio resulted in an actual cash-flow and credit analysis more appropriate for a single-B rating (B+), S&P reported. But the buildup of nearly $200,000 in excess par as well as the deal’s compliance with its par-value and interest-coverage tests kept the demotion to a single step.

Accunia is the first European or U.S. CLO to have undergone a downgrade from either S&P or Moody's as the result of a WAS reduction in the past year's tightening spread environment, according to agency spokespersons.

A number of U.S. CLOs have faced note downgrades in recent years, but that was primarily from exposure to loan delinquency and defaults in the oil and gas industry.

Accunia is one of two CLOs led by the Danish manager, which debuted in 2016.

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