Press Release|Structured Credit
KBRA Releases Research – Navigating European CLO Tail Risk: Mind the Amortisation Gap
19 Mar 2024 | London
KBRA UK releases a report exploring the increasing number of amortising European collateralised loan obligation (CLO) transactions that have reached the end of their reinvestment period and are not expected to be refinanced in the near term due to the prevailing rate environment. As such, they have begun to amortise and return principal to noteholders. However, the rate of paydown can be influenced by a number of factors that can cause variability in the outstanding life across transactions—or even against expectations at the time of transaction closing. In this report, we explore the amortisation profiles of European CLOs.
Key Takeaways
- Market amortisation rates at the end of a reinvestment period vary greatly across managers. As of the sixth period after ending reinvestment, senior tranche amortisation can range from 0% to 53% by manager.
- Vintage also matters, as transaction seasoning influences the amortisation profile. This is because collateral, documentation, and reinvestment provisions tend to have similarities among the same vintage cohort. Currently amortising transactions from 2020 are paying down at the fastest rate to a weighted average AAA-rated tranche factor of 0.5 after seven periods. Conversely, those from 2022 are returning principal at the slowest rate, reaching a weighted average factor of only 0.92 after seven periods.
- The end of the reinvestment periods does not mean the end of reinvestments. Certain documentation provisions allow managers to continue making collateral purchases according to specific criteria and circumstances. The fastest amortising managers tend to execute fewer trades on average during the amortisation process.
- Transaction extension exposes the structure to the risk of deteriorating credit quality, as well as defaults that may be associated with adverse selection. Restrictions placed on managers in the post-reinvestment period are designed to mitigate this risk. Such restrictions will be put to the test given the volume of transactions that have entered or will enter amortisation periods.
Click here to view the report.
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