The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site. Please see our Subscription Terms and Conditions.


All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.
Capital Markets

CLO downgrades: CLO market teeters on the brink

Yet more methodology-tweaking by Moody’s and Standard & Poor’s last month brought the prospect of downgrades to the triple-A tranches of cash CLOs ever closer to reality. Moody’s actions early in the month resulted in nearly 3,600 tranches rated double-A and below of 760 US and European CLOs now facing downgrades. S&P’s new approach envisages a 1.6 notch downgrade for senior triple-As, a 4.3 notch downgrade for junior triple-As and a 5.8 notch downgrade for triple-Bs.

"As usual, the rating agencies are light years too late on this," comments one structured credit expert. "The market has already priced this in." But with downgrades of this magnitude, and the continuing deterioration in underlying loan performance, the market is braced for further turmoil that it can ill afford. "The real fear is the impact of banks being forced to unwind their CLO positions," says one analyst. "Most banks are holding these assets in available-for-sale books, but if they fall below investment grade the risk weighted asset capital requirements under Basle II are severe."

Expectations of defaults

As the agencies get more aggressive, CLO investors are increasingly positioning themselves not just for downgrades but also for defaults. The average triple-C basket in a US CLO is already 11% and many structures are close to breaching their overcollateralization tests (the average triple-C bucket in a CLO ranges from 7.5%

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree