May 13, 2020 / 10:34 AM / 24 days ago

Pandemic poses big risk to collateralised loans market: EU watchdog

LONDON (Reuters) - The coronavirus pandemic poses significant risks to the collateralised loan obligations (CLOs) market as the creditworthiness of the debt deteriorates, the European Union’s securities watchdog said on Wednesday.

CLOs are securities backed by a pool of loans taken out by companies that have high levels of debt and typically a non-investment grade credit rating.

With economies entering deep recessions following lockdowns to fight the COVID-19 pandemic, many companies are struggling to stay afloat and repay loans.

The European Securities and Markets Authority (ESMA) said it had a number of concerns about how credit rating agencies Moody’s Investors Service, S&P Global Ratings and Fitch Ratings rate CLOs.

“With the COVID-19 outbreak, the credit quality of the CLO loan portfolio has started to deteriorate, with CRAs downgrading or issuing negative outlooks on some leveraged loans included in CLO portfolios,” ESMA said in its report.

The watchdog, which authorises and regulates rating agencies in the EU, said it would monitor the agencies’ response to COVID-19 and continue to assess the potential risks posed by CLOs, their ratings and associated rating processes to investors, markets and financial stability.

“The COVID-19 pandemic poses significant risks for CLO instruments, which will test the rigorousness of CRAs (credit rating agencies) rating methodologies to respond to changing circumstances,” ESMA Chair Steven Maijoor said in a statement.

Fitch Ratings said its CLO ratings appropriately reflected the credit risk they address, and were produced in line with all applicable regulations.

“We look forward to reviewing the report in more detail, including discussing it with a range of market participants,” Fitch said.

S&P and Moody’s had no immediate comment.

The Financial Stability Board has estimated that the leveraged loan market was worth $1.4 trillion to $3.2 trillion in 2018, with just a few global banks in the United States and European Union accounting for 86% of CLOs issued.

ESMA said it expected rating agencies to continue to perform regular stress-testing simulations and to provide market participants with timely, granular information on the sensitivity of CLO credit ratings to key economic variables affected by the pandemic.

Reporting by Huw Jones; Editing by Alison Williams and Jane Merriman

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below