MOODYS.COM DECEMBER 2015 EDITION CONTACTS Managing Editor Algis Remeza Editors Jerry Gluck Aaron Johnson KEY LINKS » CLO & Structured Credit Quick Check » CLO Global Methodology » 2016 Outlook - Global CLOs ABOUT US Moody’s CLO/Structured Credit Group is the leading source for credit ratings and research on collateralized loan obligations (CLOs), and the entire structured credit market. The CLO/Structured Credit Group leverages Moody’s decades of experience in bank loans and high yield as well as our market-leading default studies to produce the most accurate rating methodologies for this asset class. NEWS & ANALYSIS 2016 Outlook – CLO Performance Will Remain Solid Despite Weak Credit Quality of Loans Collateral defaults will remain low for both US and European CLOs in 2016. 3 Some US CLOs' Compliance with EU Risk Retention Rules Raise Insolvency Concern US CLOs that use an “originator” structure to comply with European Union (EU) risk retention rules take on exposure to the originator’s insolvency. 19 European and US CLOs Have Low Exposure to the Auto Sector and Little Exposure to VW Debt The European and US CLO 2.0s we rate do not hold any VW debt and have just negligible exposure to VW’s suppliers. 23 Side Effects of Pharma Price Scrutiny Will Stem CLO Gains from M&A Activity CLOs have indirectly benefited from high levels of M&A activity in the sector. 25 HEARD FROM THE MARKET Opal CLO Summit 27 PERFORMANCE & SURVEILLANCE Market Pulse 29 CLO Rating Surveillance Update: November 2015 35 MOODY’S BULLETIN BOARD Events, New Issuance, Satisfaction of Rating Agency Conditions, Announcements, Publications 38 NEWS & ANALYSIS 3 MOODY’S CLO INTEREST 17 DECEMBER 2015 2016 Outlook – CLO Performance Will Remain Solid Despite Weak Credit Quality of Loans Originally published on 2 December 2015 Executive summary In 2016, US broadly syndicated loan (BSL) collateralized loan obligations (CLOs) will continue to perform well. Loan defaults will increase modestly, but remain low. Recent tightening in underwriting standards will help improve the credit quality of loans being issued but will hurt the liquidity of weak borrowers. New CLO transaction terms and credit enhancement will not deteriorate, helping deals weather the increase in defaults. Existing transactions will also fare well – reinvesting deals will comply with their collateral quality tests and amortizing deals will continue to benefit from deleveraging despite diminishing asset diversification and the sometimes-lower quality of remaining collateral. New issuance volume will continue to decline from the 2014 all-time peak as leveraged loan supply remains constrained and the market prepares for US risk-retention rules to become effective. The performance of US small and medium-sized (SME) enterprise CLOs will largely mirror that of BSL CLOs in 2016 and remain strong. European CLOs will also continue to perform well, owing to low default pressure, despite declining underwriting standards and weaker economic growth than in the US. As in the US, CLO structures have not deteriorated and most deals will be able to absorb an expected increase in defaults owing to their structural protections. In line with 2015, Asia (ex-Japan) CLOs will continue to perform well in 2016. The region’s low default rate and regional diversification will support asset quality. Meanwhile, Chinese CLO credit quality will deteriorate owing to China’s slowing growth and worsening corporate credit profiles. We discuss CLOs in the following order: » US BSL CLOs: backed primarily by US broadly syndicated leveraged loans » US SME CLOs: backed primarily by US SME loans » European BSL CLOs: backed primarily by European broadly syndicated leveraged loans » Asian (ex-Japan) CLOs: backed by credit default swaps (CDS) that reference loans multinational banks make to mostly Asian (ex-Japan) companies » Chinese CLOs: backed by loans from balance sheets of Chinese banks Jeremy Gluck Research Analyst +1.415.274.1740 jeremy.gluck@moodys.com Danielle Nazarian Senior Vice President +1.212.553.4054 danielle.nazarian@moodys.com Algis Remeza Senior Vice President - Manager +1.212.553.4362 algis.remeza@moodys.com Paul Buttress Senior Vice President +1.212.553.4409 paul.buttress@moodys.com Justyna Kochanska Assistant Vice President - Analyst +44.207.772.5615 justyna.kochanska@moodys.com Mizuho Tanaka Assistant Vice President - Analyst +44.207.772.8616 mizuho.tanaka@moodys.com Wei Jiao Analyst +49.69.70730.736 wei.jiao@moodys.com Georgina Lee Assistant Vice President - Research Writer +852.3758.1560 georgina.lee@moodys.com Cecilia Chen Associate Analyst +852.3758.1552 cecilia.chen@moodys.com This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 4 MOODY’S CLO IN