The pace of defaults and negative credit migration within European CLO portfolios is slowing, according to a report by Fitch Ratings.

There was an average of 8.5 defaults per quarter last year. Fitch compared this to two so far in 2Q10 and four in 1Q10.

Although the average cumulative default rate per CLO increased to 8.9% from 5.7% of target par since the agency’s last report, the rate of defaults is slowing.

Additionally, CLO portfolios saw their ‘CCC’ exposure decline to 11.6% from 12.5% from last year’s levels. Average senior over-collateralization (OC) test results rose to 131.6% from 127.4% and ‘BB’ OC test results increased to 103.6% from 102.5% since 2009.

"Excess spread diversions and loan prices improvement boosted OC levels,” said Jeffery Cromartie, a senior director in Fitch’s structured credit surveillance team. “Also more recent loan restructurings have resulted in less senior debts write-off."

"Over the long term, Fitch still expects to see more 'CCC' names defaulting due to unsustainable levels of leverage, but for now most CLOs are showing signs of near-term stability,” he added.

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