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Saturday 26 July 2008
Fitch Ratings has forecast a 20% drop by 2011 in the number of European companies managing collateralised loan obligations which could threaten refinancing in downtrodden sectors and ultimately pull long-term institutional investors into leveraged loans.
The impact on the retail investment market will see less liquidity for companies looking to refinance especially in the automotive, building materials, consumer products and packaging sectors, said Fitch analyst Pablo Mazzini.
‘The problem with the business cases we looked at was that virtually none of them included cyclicality,’ Mazzini said. Citing non-food retail as an example, he said plans were based on organic growth and expansion through acquisition. ‘And we know that is not sustainable in the longer term. Four years ago they were more conservative.’
Managers of collateralised loan obligations – the debt securitisation at the root of the sub-prime crisis – are being hit by poor performance, and will face consolidation pressures as financing deals run out in the next few years. Default rates had remained low so far – around 1% – mainly because of ‘covenant-light’ agreements, Mazzini said.
‘This inevitable refinancing wave will require the restoration of the CLO business model or, alternatively, the attraction of other long-term institutional investors into leveraged loans,’ he said. 'When the primary market returns in a consistent manner, it will be driven by more discriminating buy-and-hold bank and mezzanine investors demanding more conservative structures.'
He said companies in the loan market, such as Prudential M&G, Invesco, Habourmaster and Alcentra, must take stock of GDP estimates which Fitch had lowered for the US, UK and Europe, and said globally would be diminished, too, but supported by emerging economies.‘The level of headroom is low,’ he said of reduced issuer default ratings to B- debt in the worst affected sectors. ‘The margin for execution is low.’
A fifth of Europe’s 60 collateralised debt obligation managers would drop out of the market in the next three years because of poor performance primarily with the 60% of managers who entered the market ‘opportunistically’ at its height in 2006 and 2007, Fitch analyst Manuel Arrive said.
Source:
http://www.citywire.co.uk
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