December 2017KEY LINKS»CLO Global Methodology»SME & Mid-Cap FocusAbout usMoody’s CLO/Structured Credit Groupis the leading source for credit ratingsand research on collateralized loanobligations (CLOs) and the entirestructured credit market. The CLO/Structured Credit Group leveragesMoody’s decades of experience inbank loans and high yield as well asour market-leading default studiesto produce the most accurate ratingmethodologies for this asset class.FEATURE ARTICLES2018 US CLO Outlook: Continued economic growth willbolster performance amid weakening in both loan quality andCLO structures2Our view of the credit quality of the sector in 2018, focusing on the credit quality of newleveraged loans and CLOs, the performance of existing CLOs and forecasts for new issuance levels.2018 European CLO Outlook: Deal credit quality andperformance will remain strong on general macro stability7Our view of the credit quality of the sector in 2018, focusing on the credit quality of newleveraged loans and CLOs, the performance of existing CLOs and forecasts for new issuance levels.2018 Global Cross-Sector Outlook: Credit conditions improveas healthy economic growth moderates financial stability andpolitical risks12Six themes will shape credit in 2018 and beyond: growth, financial stability, political andgeopolitical risk, technology and innovation, climate change and sustainability, and demographics.PERFORMANCE & SURVEILLANCESeptember 2017 Market Pulse: Restructurings offset defaultsamong US CLO 2.0s13November 2017 Surveillance Update: With no US ratingchanges, Europe drives upgrade action19MOODYS.COM FEATURE ARTICLES2018 US CLO Outlook: Continued economic growth will bolsterperformance amid weakening in both loan quality and CLO structuresOriginally published on 30 November 2017A stable economy and solid liquidity will continue to support the performance of U.S. broadly syndicated loan (BSL) and small andmedium-sized enterprise (SME) collateralized loan obligations (CLOs) in 2018 amid continued collateral quality deterioration and somestructural weakening.»CLO collateral quality will weaken, but the CLO 2.0 structure will mitigate the negative impact. Leveraged loan investors'accommodation of small borrowers, high leverage and low debt cushions will continue to drive weakening portfolio credit qualityamong CLOs we rate. While new deals will largely maintain key CLO 2.0 structural features, managers' continued push for moreflexibility will lead to some structural weakening.»Economic growth and solid liquidity will foster stable CLO performance despite worsening collateral quality. Moderateeconomic growth and solid liquidity among corporate borrowers, as well as stable or positive outlooks for most of the largest CLO-exposed sectors, will support largely stable performance among the CLOs we rate. However, CLO collateral quality metrics willcontinue to worsen, in some cases leading to test failures that curtail trading.»CLO issuance will remain high in 2018. We expect CLO issuance in 2018 to roughly match 2017's level amid steady loan supplyand a diversifying investor base. As refinancing activity slows, resets will again constitute a significant portion of new ratings.CLO collateral quality will weaken, but the CLO 2.0 structure will mitigate the negative impactCLOs' collateral credit quality will continue to weaken as BSL investors accommodate companies with high leverage and low debtcushions, while also lending to more SMEs. While new deals will largely maintain key CLO 2.0 structural features, structures willweaken somewhat as a result of managers' increased push for more flexibility, including the ability to materially amend variousindenture provisions.Several factors will drive a decline in CLO collateral qualityThe factors that will continue to reduce CLO collateral credit quality include an increased prevalence of small borrowers, and morerelaxed underwriting in the form of rising leverage and shrinking debt cushions.As of November 1, B3 obligors accounted for 39% of leveraged loan issuance by issuer count, the largest such percentage since 2014.Similarly, as small companies gain access to the BSL market, the share of Caa issuers is rising, albeit modestly. Weakness extends to theSME market, where the average rating factor for new deals climbed to 4137 in 2017, corresponding to a level about halfway between B3(3490) and Caa1 (4770), and up from 3977 in 2016.1Regulatory guidance on overall leverage remains in place, but its effectiveness is diminished by measures of leverage that reflectaggressive EBITDA projections, as well as lending by nonbank institutions to which the guidance does not apply. Although the U.S.Treasury has proposed a more flexible application of leverage guidelines, it is doubtful whether this will have an impact in 2018,particularly because the Federal Reserve and the other bank regulators that administer the guidelines are independent of the Treasury.2Meanwhile, leveraged loan debt cushions continu