articles Ratings /ratings/en/research/articles/240418-clo-spotlight-twenty-five-years-strong-european-clos-lifetime-default-rate-is-only-1-5-13072276.xml content esgSubNav
In This List
COMMENTS

CLO Spotlight: Twenty-Five Years Strong: European CLOs' Lifetime Default Rate Is Only 1.5%

Covered Bonds Uncovered

COMMENTS

2025 U.S. Residential Mortgage And Housing Outlook

COMMENTS

Weekly European CLO Update

COMMENTS

Scenario Analysis: Middle-Market CLO Ratings Withstand Stress Scenarios With Modest Downgrades (2024 Update)


CLO Spotlight: Twenty-Five Years Strong: European CLOs' Lifetime Default Rate Is Only 1.5%

(Editor's Note: We intend to update this article periodically as the tally of European CLO tranches rated 'D' changes due to additional defaults. Table 3 contains a list of S&P Global Ratings-rated CLO tranches that have defaulted.)

European collateralized loan obligations (CLOs) have proved remarkably stable since S&P Global Ratings rated its first transaction in 2000. During this time, European CLOs have resisted several upheavals, including the global financial crisis, the dotcom bubble, and the COVID-19 pandemic, and have seen very few defaults.

In Europe, we refer to CLOs issued since 2013 as CLO 2.0 and those issued before the global financial crisis as CLO 1.0. We include transactions backed by loans to large corporates, but exclude those backed by loans to small and midsize enterprises, those backed by collateral in a single jurisdiction, and the collateralized debt obligations of asset-backed securities.

CLO 1.0: 25 Years Of Solid Credit Performance

From 2000 to the end of 2009, S&P Global Ratings rated almost 1,500 CLO tranches issued by over 220 European CLOs. We have since withdrawn all of these ratings as the tranches were mostly redeemed in full, with only a small number defaulting. Of the almost 1,500 CLO tranches, a mere 22 defaulted, 20 of which were term notes and two combination notes. Four were from tranches that we initially rated investment grade (in the 'BBB' category), and two of these were pari passu tranches in the same transaction. Overall, 13 CLOs, across seven collateral managers, had at least one tranche suffering a default.

Will CLO 2.0 Outperform CLO 1.0?

After 11 years, European CLO 2.0 transactions' credit performance is arguably stronger than that of their earlier counterparts, with no tranche defaulting or having a rating in the 'CCC' category. This is thanks to CLO 2.0 transactions' better structural protections, namely:

  • They have greater credit enhancement, especially at the senior level. 'AAA' credit enhancement has increased to 38% from 30% in European CLO 1.0 transactions, while 'AA' credit enhancement has risen to 29% from 23%. At the more junior 'BB'/'B' level, the credit enhancement is lower than in CLO 1.0 transactions.
  • Their eligibility criteria focus on corporate debt and exclude structured finance and synthetic assets.
  • A large portion of the issuers now have ratings, whether public, private, or confidential, whereas in CLO 1.0 transactions, credit estimates were more prevalent.
  • The structures tend to have less leverage, shorter reinvestment periods, and fewer derivatives such as currency options and basis swaps.
  • The structures now include a risk-retention rule to align the interests of different stakeholders. This is otherwise known as "skin in the game".

For the time being, we do not rate any European CLO 2.0 tranches in the 'CCC' category. CLO 2.0 transactions have typically undergone a reset or refinancing, meaning that most of the original notes do not follow the typical amortization pattern.

Table 1

European CLO transactions -- default summary by original rating
--CLO 1.0-- --CLO 2.0--
No. of original ratings No. of defaults Currently rated No. of original ratings No. of defaults Currently rated
AAA 481 0 0 846 0 495
AA 227 0 0 917 0 648
A 249 0 0 594 0 406
BBB 296 4 0 567 0 391
BB 211 17 0 528 0 381
B 11 1 0 474 0 366
Total 1,475 22 0 3,926 0 2,687
Trustee report data to Jan. 31, 2024. CLO--Collateralized loan obligation. European CLO 2.0--European CLOs closed between Jan. 1, 2013, and March 31, 2024.

Table 2

European CLO 2.0 issuers -- default summary by original rating
No. of CLOs No. of defaults No. of outstanding CLOs
AAA 418 0 373
AA 422 0 380
A 423 0 380
BBB 423 0 381
BB 421 0 381
B 393 0 364
Total 2,500 0 2,259
CLO--Collateralized loan obligation.

European CLO 2.0 Transactions Continue To Perform Well In Challenging Conditions

Challenges include the conflicts in Ukraine and Israel and higher interest rates than in the past five years. While the number of corporate defaults is increasing, it remains low compared to historical levels.

In our view, the structural protections that CLO 2.0 transactions have introduced will help sustain their performance. However, concerns persist about the flexibility that the leveraged loan and CLO 2.0 documentation gives portfolio managers. For example, we have seen instances of CLOs exiting the reinvestment period but remaining fully reinvested for several years. The longer the CLO is reinvested, the longer the 'AAA' noteholder will have to wait to receive the principal repayment.

Another challenge that CLOs 2.0 transactions are likely to face concerns the recovery amount when obligors default. The underlying loans' covenant-lite nature and weaker documentation will lead to lower recovery rates than historical levels.

Table 3

CLO defaults in Europe*
CLO name Class name DOA initial rating Reinvestment Initial rating Initial credit enhancement Rating before default Date of default Reason for default
Avoca CLO II B.V. C-1 Nov-04 5.2 BBB 9.1 CCC- Aug-16 Principal loss
Avoca CLO II B.V. C-2 Nov-04 5.2 BBB 9.1 CCC- Aug-16 Principal loss
Avoca CLO II B.V. D Nov-04 5.2 BB 7.7 CC Aug-16 Principal loss
Avoca CLO III PLC E Aug-05 6.1 BB 7.4 CCC- Mar-17 Principal loss
Avoca CLO IV PLC E Def Jan-06 6.1 BB 6.9 CCC- Aug-16 Principal loss
Avoca CLO V PLC F Aug-06 6.0 B 5.6 CCC- Apr-18 principal loss
BACCHUS 2007-1 PLC E Sep-07 5.6 BB- 8.5 CCC- Feb-18 Missed interest payment
Leopard CLO I B.V. E-1 Jan-03 5.1 BB 7.7 CCC- Nov-15 Principal loss
Leopard CLO I B.V. E-2 Jan-03 5.1 BB 7.7 CCC- Nov-15 Principal loss
Leopard CLO II B.V. D Apr-04 5.0 BB 9.4 CC Oct-16 Missed interest payment
Leopard CLO III B.V. E1 Apr-05 5.0 BB- 7.1 CCC- May-17 Principal loss
Leopard CLO III B.V. E2 Apr-05 5.0 BB- 7.1 CCC- May-17 Principal loss
Leveraged Finance Europe Capital III B.V. D Oct-04 5.0 BBB- 9.6 CCC- Feb-17 Missed interest payment
Leveraged Finance Europe Capital III B.V. E Oct-04 5.0 BB- 7.1 CC Nov-18 Principal loss
Munda CLO I B.V. E Dec-07 6.0 BB- 8.65 CCC Oct-19 Principal loss
North Westerly CLO I B.V. IV-A Jun-03 5.0 BB- 7.4 CC Aug-16 Principal loss
North Westerly CLO I B.V. IV-B Jun-03 5.0 BB- 7.4 CC Aug-16 Principal loss
North Westerly CLO II B.V. D-1 Sep-04 6.0 BB- 7.8 CC Sep-17 Principal loss
North Westerly CLO II B.V. D-2 Sep-04 6.0 BB- 7.8 CC Sep-17 Principal loss
Strawinsky I PLC D Aug-07 6.0 BBB 10.9 B- Mar-20 Missed interest payment
*The table excludes combination notes. CLO--Collateralized loan obligation. DOA--Date of assigning.

Our EMEA CLO Collateral Managers Dashboard compares weekly European CLO data. This is a single snapshot view of CLO-critical credit risk factors where you can examine, compare, and benchmark individual S&P Global Ratings-rated European CLOs: https://www.spglobal.com/ratings/en/research-insights/topics/powerbinew

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Abhijit A Pawar, London + 44 20 7176 3774;
abhijit.pawar@spglobal.com
Secondary Contacts:Emanuele Tamburrano, London + 44 20 7176 3825;
emanuele.tamburrano@spglobal.com
Shane Ryan, London + 44 20 7176 3461;
shane.ryan@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.

 

Create a free account to unlock the article.

Gain access to exclusive research, events and more.

Already have an account?    Sign in