Some European CLO transactions may be susceptible to undercollateralization event of default triggers (EoD triggers) if leveraged loan prices continue at depressed levels and cumulative defaults reach 25% over the next two years, according to Fitch Ratings.

The prospect of some EoD triggers being breached draws on a scenario analysis based on European CLO's risk exposure to undercollateralization EoD triggers.

“The performance of European CLOs is deteriorating due to the stress in the leveraged loan sector that has resulted from the economic downturn,” said Jeffery Cromartie, senior director and head of Fitch’s European structured credit performance analytics. “Between December 2008 and March 2009, a first wave of defaults in the leveraged loan sector occurred, resulting in a breach of overcollateralization tests for most Fitch-rated European CLOs.”

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