OREANDA-NEWS. Fitch Ratings says in its latest European Leveraged Loan CLO Tracker that CLO issuance continues to show strong growth, while managers display their management strategies.

The CLO market saw 38 new transactions in the 12 months to July 2015, up 36% on the same period a year ago. In this period, 10 managers have entered the post-crisis CLO market, easing the burden of risk retention by adding to the pool of available retention capital.

Loan supply has been much lower so far in 2015 (down 47%) compared with the same period last year. Fitch estimates total loan issuance of EUR40bn for 2015, down from EUR65bn in 2014. While it is too early to determine if this has had an impact on ramping periods to date, it may lengthen the ramping periods of transactions that are currently ramping up and transactions which close in the near future, as loan supply from the primary market falls.

The limited universe leads to a significant overlap between assets included in CLOs, approximately 48% between different managers. This is significantly higher than in US CLOs, which are selected from a much larger universe. To date, managers have made limited use of their risk buckets ('CCC'-rated, mezzanine) and fixed-rate buckets.

Losses have remained limited, with par built through manager trading typically absorbing any losses experienced to date. Of the 44 post-crisis CLOs rated by Fitch that have gone effective to date, only six currently have a par balance below target par.

Managers have shown differing strategies with regard to trading activity, as annual turnover (proportion of portfolio purchased in a year) and trading rates (proportion of portfolio sold in a year) has varied significantly between transactions.

Post-crisis CLOs have begun equity distributions at levels lower than pre-crisis CLOs, due to the increased cost of liabilities. Annualised equity returns vary between 12% and 22%. The equity distributions of pre-crisis CLOs continue, with 17 of the 20 currently outstanding transactions rated by Fitch making a distribution during the prior 12 months. The highest annualised equity return was 35%.

An average ramp time of about 15 weeks is driven by leveraged loan supply, which can be affected by macroeconomic conditions and the loan sourcing capabilities of the manager. Post-crisis CLOs have all fully ramped up in advance of their effective date deadline; however, ramp-up time can vary greatly, from three to 29 weeks in Fitch-rated transactions.

Currently outstanding pre-crisis Fitch-rated CLOs have amortised by an average 28% in the 12 months to June 2015, with the average portfolio factor falling to 49% from 69% a year ago. Four transactions were redeemed during this period, bringing the pre-crisis Fitch-rated CLO universe down to 20. Obligor concentration in these amortising portfolios may prevent upgrades to high investment-grade rating. The average number of obligors in these transactions is 49.

Fitch monitors credit opinions on 440 European loan issues. The report, European Leveraged Loan CLO Performance Tracker, is available on www.fitchratings.com.