European private credit CLOs ‘will remain niche’, says Moody’s
European private credit collateralised loan obligations (CLOs) will remain a niche subsegment of the CLO market, Moody’s Ratings has said.
In an outlook report on the CLO market, the ratings agency said that the vehicles will continue to face several credit challenges relative to broadly syndicated loan (BSL) CLOs.
“Those challenges include highly concentrated and largely unrated portfolios, higher expected losses, currency issues, low diversity scores, requirements for ratings from two rating agencies, and credit estimate fees for unrated underlying assets,” Moody’s said.
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“Although some European private credit CLOs will be akin to US middle market CLOs, a well-established asset class with a strong performance history, others will likely be backed by loans to considerably smaller companies, such as those whose debt backs SME asset-backed securities (ABS), or, at the other end of the spectrum, typical BSL borrowers.”
The ratings agency went on to say that private credit CLO structures will be similar to those of BSL CLOs, but with some differing features to make up for their relatively weak collateral, such as greater subordination for rated tranches.
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“Private credit CLOs’ relatively high liability costs could erode excess spread, although a broadening in the investor base could bring down liability spreads to some extent,” Moody’s added.
The ratings agency’s comments come just after Barings launched the first ever European middle market private credit CLO this week, at €380m (£315.7m).
Barings’ Euro Middle Market CLO will be rated by both S&P and Fitch.
