While European CLO managers have suffered less from tightening collateral spreads than their U.S. counterparts, some market players are noting a trend of borrowers in the European loan market becoming increasingly leveraged.

Unlike in the U.S., European borrowers are placed in one of several credit quality tiers, and charged an associated "fixed" spread - currently 325 basis points for the loans that end up in CLOs. While the fixed spread method, as opposed to name-by-name pricing, has kept the arbitrage intact in the last few months, originating banks are lending more aggressively.

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