Europe CLOs Give Better Value on High-Rated Notes, Barclays Says

The higher-rated portions of European collateralized loan obligations are offering better value than U.S. deals as the terms and structures provide sufficient compensation for risk, according to Barclays Plc.

The AAA ranked pieces of the three European transactions completed this year pay investors between 130 basis points and 140 basis points more than the euro interbank offered rate, compared with an average of 120 basis points for U.S. deals, according to the report. A basis point is 0.01 percentage point.

“Given the remote chance of losses at higher quality levels, we believe European AAA, AA, and A rated CLO tranches offer a good opportunity for spread pickup relative to comparably rated U.S. CLO tranches,” Barclays analysts led by Bradley Rogoff wrote in the report published today. “U.S. investors should consider taking advantage of this differential while it lasts.”

The new European CLOs have been structured “more conservatively” than the U.S. deals because they have higher potential of defaults and lower diversification in the collaterals, and less liquidity in the secondary market, the analysts wrote in the report.

CLOs pool high-yield loans and slice them into debt securities of varying risk and return, typically from AAA ratings down to B. The lowest portion, known as the so-called equity tranche, offers the highest potential returns and the greatest risk because investors are the first to see their interest payouts reduced when the loans backing the CLOs default.

The three new European CLOs priced this year have rated notes amounting to 4 times to 6.4 times the equity portions while the average of U.S. deals is 9.6 times, according to the report.

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