OREANDA-NEWS. Fitch Ratings says in a new report that negative trade date cash balances in European CLOs 2.0, where managers over-invest the portfolio, may increase risk in this asset class while allowing equity noteholders to maximise potential return.

Fitch has observed an increasing number of European CLOs 2.0 reporting a negative trade date cash balance. The agency has discussed with several CLO managers and collateral administrators to gain a better understanding of this feature and accompanying risks. In Fitch's view, this feature may expose noteholders to operational and market value risk. Theoretically, it may also expose noteholders to the risk that managers may use negative cash balances to influence the over-collateralisation tests.

Positively, negative trade date cash balances can substantially increase equity return in a negative interest rate environment, where positive cash balances may represent a liability for the equity noteholder.

The report also highlights the need for more disclosure and transparency within investor reports. The report, 'European CLOs 2.0: Negative Cash Balance, Additional Risks to Boost Equity Return?', is available at www.fitchratings.com or by clicking on the link above.