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European CLOs Riskier Without More Loan Issuance, Moody’s Says

Collateralized loan obligations in Europe will become riskier if their growth is not met with an increase in leveraged-loan issuance, according to Moody’s Investors Service.

“A race to ramp up portfolios would likely lead to a decline in underwriting standards or the inclusion of riskier or lower-credit-quality assets, such as non-euro-denominated assets or assets domiciled in Europe’s peripheral countries which would in turn increase credit risk and hedging costs,” Moody’s analysts led by London-based Dimitri Kaltsas, wrote in a report yesterday.

Origination of new leveraged loans is unlikely to be strong this year before picking up gradually after 2013, according to Moody’s.

Almost 1 billion euros ($1.31 billion) of European CLOs have been sold this year, while at least 1.1 billion euros more from Blackstone Group LP’s GSO Capital Partners LP, Carlye Group LP and Alcentra Ltd. are being marketed to investors, according to data compiled by Bloomberg.

As the reinvestment period of 84 percent of the European CLOs will end this year, loans that would have been bought by them will become available to new funds, according to the report. New CLOs will also be able to find assets from existing deals going through deleveraging.

CLOs exiting reinvestmnent periods need to start using interest payments received on loans they hold to pay off investors rather than buy debt.

CLOs are a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return.

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