European CDO year-to-date issuance volumes in 2006 are up by more than 100% compared with the levels posted this time last year. Ten European CDOs came to market in February, bringing 2006 volumes to 6.6 billion ($7.87 billion).
Analysts at Deutsche Bank said the market is unlikely to lose its momentum in the coming months.
"Much as we had expected for 2006, leveraged loan CLO issuance has been robust, reflecting to a large degree the volumes seen in the underlying European loan market," wrote Deutsche Bank analysts in a monthly research report on the sector. "In January 2006 alone, primary loan volumes totaled ... 20 billion ($23.8 billion), maintaining the momentum seen in 2005 during which loan issuance fell just shy of 125 billion [$149 billion]."
February saw the debut of several leveraged loan CDOs launched by established asset management firms. Among those issues were Cheyne Capital's 1 billion ($1.1 billion) credit opportunity fund-like CDO - the largest ever leveraged loan securitization in Europe. Henderson Global Investors priced its 300 million ($358 million) MAGI I transaction. IKB brought its 400 million ($477 million) BACCHS 2006-1 leveraged loan CDO to market - the first time this German bank departed from its SME loan securitizations.
SME CLO issuance generally has remained light following the flood of product seen at the end of 2005, Deutsche Bank said.
European structured product cash CDOs continue to show strong credit performance. According to Deutsche Bank, asset upgrades over the last 12 months have ranged between 15% and 32% of the portfolios against downgrades ranging between 1.5% and 2.5%. Portfolio rating factors remain stable to improving.
"As we have remarked in recent months, the bigger issue for structured product CDOs is the spread compression following prepayments of higher yielding, older assets coupled with the difficulties in sourcing fresh assets with adequate yield," wrote analysts at the bank.
They also said although European leveraged loan CLOs continue to show stable performance, they expected name-specific credit weakness to become more pronounced in the coming months.
"Mixed CDO portfolios with significant high-grade exposure have exhibited generally weaker performance recently, reflecting the impact of LBOs and M&A as well as the credit deterioration in the U.S. automotive sector," the analysts wrote.
The latest casualties are those transactions tied to U.S. auto parts supplier Dana Corp., which filed for Chapter 11 protection. Fitch Ratings said last week that it placed four tranches from three public CDOs and 13 tranches from three private CDOs on rating watch negative following Dana's filing.
Fitch has rated 31 tranches of 18 European deals and 177 tranches of 42 U.S. deals that have over 1.63 billion exposed to Dana. Fitch said it would decide whether to downgrade the 17 CDO tranches on watch negative when final valuations for Dana in each transaction are made available.
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