A number of European CLOs issued before the financial crisis are ripe for redemption, and this could free up loans to be used as collateral in new deals, according to Moody’s Investors Service.
In research published this week, Moody’s said that over 80% of the 16 European collateralized loan obligations issued pre-crisis that it rates are entering their reinvestment periods by the end of this year. As these deals begin to amortize, or pay down the principal of senior notes, the returns of the most subordinated trances will diminish. This, combined with the strong performance of the leveraged loans used as collateral, will motivate equity holders to call so-called CLO 1.0 deals. (CLO equity holders typically have call rights to deals.)
Moody’s has identified 11 European CLO 1.0 deals that it says are currently “prime candidates” for such redemptions: one each from the 2002, 2003, 2004, 2005, 2006 and 2007 vintages; four from the 2008 vintage and one from the 2010 vintage.
By selling loans to finance redemptions, these CLOs could contribute nearly 2.9 billion of loan supply for new European CLO 2.0 deals, Moody’s reckons. This additional loan supply is a “credit positive,” as it will allow managers of new deals to better diversify their asset pools and increase the amount of eligible collateral for their CLOs when ramping up.
Eligibility criteria for CLO collateral normally cover type, geography, rating, parent entity concentration, industry and market value at purchase, all with specific concentration levels to secure a diversified portfolio.
The loans in the CLO 1.0 call candidates are largely domiciled in the U.K., France, Germany and The Netherlands, which represent 76% of the available loans. Fifty-three percent of the loans are in the business service, retail, telecommunications, broadcasting & subscription media, and healthcare & pharmaceuticals sectors. These assets have an average life of three years and an average rating of B3.