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Fitch issues rare CLO mezzanine default rating

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.

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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million balance of the notes was repaid following the liquidation of the deal, and all ratings on the transaction were withdrawn.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.

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