OREANDA-NEWS. Post-crisis European CLO 'AAAsf' ratings would avoid downgrades even if faced with stresses similar to those experienced during the height of the financial crisis, Fitch Ratings says. CLOs 2.0 benefit from greater credit enhancement and improved portfolio homogeneity.

We analysed all Fitch-rated European pre-crisis CLOs that had similar collateral profiles to the new generation of transactions. The analysis included 26 transactions with 190 tranches outstanding in 2007. None of the 34 senior 'AAAsf' rated tranches outstanding in 2007 were ever downgraded. Their average credit enhancement was 37.5%, well below the average credit enhancement of nearly 41% for European CLOs 2.0.

Pre-crisis junior 'AAAsf' tranches, which had less credit enhancement, did experience downgrades, but virtually all those were only to the 'AAsf' category.

The rating migration includes the effect of methodology updates, including our substantial CLO criteria revision in 2008, in addition to performance deterioration from 2007. We still use largely the same methodology to rate CLO transactions, so the hypothetical performance of CLO 2.0 transactions over the same period can therefore be inferred from the rating migration, factoring in the higher credit enhancement.

Pre-crisis CLOs with collateral profiles similar to CLOs 2.0 also performed well in terms of defaults. Only three tranches from the 26 comparable pre-crisis deals rated by Fitch defaulted.