Fitch Ratings has issued a rare default rating on a subordinate tranche of pre-crisis European CLO, in the second major junior-debt downgrade of a euro-denominated collateralized loan obligation this year.

Fitch’s London office announced Wednesday in a release it was assigning a final D rating to the Class F notes of Avoca CLO V, following a late final payment as the €543.2 million 2006-vintage CLO was being liquidated by manager KKR Credit Advisors.

The CLO was originally issued by the former European credit manager Avoca Capital, which KKR acquired in 2013.

Adobe Stock

The default rating was the result of an unpaid balance on the original $10 million Class F notes tranche at the time KKR retired the deal in February. Fitch said the €1.2 million balance of the notes was repaid following the liquidation of the deal, and all ratings on the transaction were withdrawn.

The Class F notes were initially rated B by both Fitch and S&P Global Ratings, but the rating had been downgraded twice and was at CC before the default rating.

Earlier in February, S&P downgraded a Class E notes tranche of 2016-vintage CLO managed by Denmark-based Accunia Credit Management, due a significant drop in the deal’s weighted-average spread due to credit deterioration of underlying loan assets.

Last August, S&P issued its first CLO mezzanine-tranche default rating in four years when it lowered the Class D note on the $450 million Airlie CLO 2006-II to D from CCC+ when it left nearly 14% of the original principal unpaid when manager Airlie Opportunity Capital Management took an optional redemption of the deal in October.

S&P last week published a post-liquidation analysis of Airlie’s struggles to maintain credit stability and cope with a $30 million par loss after both the financial crisis and the manager’s ill-timed 2013 foray in energy and commodities-sector loans.

S&P says that between 1994 and 2017, only 0.4% of U.S. CLO ratings across tranches of CLO portfolios have defaulted. The majority were from subordinate and mezzanine tranches of pre-crisis, “CLO 1.0” deals.

No default has ever occurred of a senior, AAA-rated tranche that is first in line for a CLO cash-flow payment stream.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.