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CLOs – Europe

2021 Outlook – Collateral quality will continue to decline while structures adapt to downturn

While the credit quality of collateral continues to weaken into 2021, mirroring trends in the leveraged finance market, sector diversification will limit CLOs' exposure to hard-hit industries. CLO structures will become more flexible to better adapt to the COVID-19 market environment, with deal credit enhancement also helping to mitigate the risk of rising defaults. Individual CLO managers' skills will gain in importance and lead to more differentiated CLO performance.
Frank Cerveny
Vice President – Senior Research Analyst, EMEA SFG Research Group
Moody's Investors Service

Podcast - Outlooks Connections Episode 3

Lower-rated leveraged loans, junior CLO tranches to bear brunt of coronavirus impact

Christina Padgett and Sandra Veseli of the Corporates team, Al Remeza of the Structured Finance team, and Ana Arsov of the Financial Institutions team discuss the outlook for leveraged finance and collateralized loan obligations (CLOs) in the US and EMEA. Coronavirus-related defaults will likely peak in 2021, but banks’ exposure is limited. Lower-rated loans to coronavirus-exposed sectors will be worst affected, with a knock-on effect on the junior tranches of existing CLOs.

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