Late Quarter Euro CLO Volume Surge Minimizes Decline from 2015

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Although European CLO issuance picked up in March following new central bank quantitative easing efforts, volume still finished the first quarter with a 42% decline from the same period a year ago, according to Moody’s Investors Service.

Moody’s reported Tuesday that its volume of rated European collateralized loan obligations of broadly syndicated loans fell to €2.05 billion from the €3.5 billion from 1Q 2015. Deal count of Moody’s rated CLOs fell from 10 in the first quarter last year to 5 this year, which the ratings agency attributed to weak leveraged loans issuance, limited investor appetite and the widening of liability spreads.

The weakness in the market was particularly acute in the first two months of the year, before a corporate bond buying program announced in March by the European Central Bank sparked a rush of new CLO issuance in the final weeks of the quarter.

European leveraged loan volume fell 58% to $8.2 billion compared to a year ago. CLO’s lagging issuance numbers were also not helped by the first-quarter weakness in European corporate high-yield bond issuance (which remains a source of European CLO collateral).  According to Moody’s, HY bond issuance fell 75% to $7.8 billion in the first quarter compared to the first quarter of 2015. However, most of that issuance was in March ($6.2 billion), with the market showing “signs of life,” the report stated.

By comparison, U.S. CLO issuance year-to-date through May 31 of $19.1 billion in 46 deals is only 40% of the total volume of the 2015: $47.2 billion from 88 deals, according to a report issued Wednesday by Wells Fargo.

Little changed in the way of default exposure, however, as Moody’s saw theEuro  CLOs’ credit quality remaining stable during a volatile Eurozone economy.  Moody’s reported that the weighted average rating factor (WARF) figures for CLOs remain on par with prior CLO 2.0 (post-crisis) levels, and defaults exposure remained unchanged at 0% for CLO 2.0s from the previous quarter.  

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