Over the last few days, headlines surrounded President Biden’s announcement that the US will be opening its borders to fully vaccinated international travelers beginning early November. This will undoubtedly impact the global commercial real estate (CRE), commercial mortgage-backed securities (CMBS), and corporate collateralized loan obligation (CLO) markets.
Last week, Trepp wrote about the current state of the hotel market and the impact this is having on CMBS loans backed by UK hotels. The easing of travel restrictions globally will surely continue to shift the occupancy, delinquency, and special servicing rates in this industry.
This week, Trepp notes the new features that have been discussed in the European CLO market, including the introduction of changes to both issuance structures and CLO documentation.
New Features Appearing in European CLOs
The issuance of CLOs in Europe has increased since the beginning of 2021, boosted by positive news of rollouts of multiple COVID-19 vaccines across the globe and better economic prospects. European CLO issuance stands at €21.50 billion from 53 deals, compared with €13.21 billion from 40 deals at the same time last year.
There have been notable changes in the financial markets and CLO landscape over the past eighteen months. The pandemic pushed market participants to consider changes to issuance structures and CLO documentation such as leverage, par, subordination, and reinvestment periods.
CLO arrangers have been discussing the introduction of new ‘CCC’ rated tranches. There are no tests for the ‘CCC’ bucket when a CLO goes live. Traditionally, for a CLO to become effective, the transaction documents have several tests, among them the extent of exposure to assets rated in the ‘CCC’ category. Some of the recent CLO transaction documents do not include such requirements or tests. In a nutshell, this means that a CLO can become effective irrespective of the exposure to ‘CCC’ rated assets in the pool.
Other developments include bigger bond buckets and no buckets for discounted assets. Recently, CLO managers have proposed the removal of the minimum loan bucket requirement, which is typically 70% of the CLO pool. This could allow CLOs to hold larger bond buckets than was previously the case. Although European CLOs have some exposure to bonds already, it is possible that the removal of this requirement could benefit the high-yield market.
UK CMBS Loans Backed by Hotels
Since the start of the pandemic, government regulations across the globe have included stay-at-home orders and intense travel restrictions, so hotels being the sector that was most severely impacted was hardly a surprise. In fact, Trepp has frequently noted the distress seen in the sector over the past 18 months, with the lodging delinquency rate reaching more than 24% at the peak of the pandemic in June 2020, up from 2.41% in June 2019.
With respect to UK CMBS transactions, Trepp data shows that as of September 9, 2021, the volume of outstanding loans currently with a special servicer is £606.7 million. Notably, 57% of the total is represented by loans secured by hotels and is related to a unique transaction, Helios (Eloc 37), launched in December 2019. Read Trepp’s full analysis of the UK hotel sector.
Trepp at Global ABS
Trepp is a proud sponsor of Global ABS 2021. We look forward to seeing everyone at the Hilton London Metropole on September 27th and 28th. Trepp has had several product enhancements and updates since the last time we attended the conference. Stop by our booth to learn about our latest insights, analytics, and solutions, or plan ahead and book a meeting with Trepp at Global ABS now.
During the conference, Trepp’s Andrea Tortora will be serving as a panelist in The European CLO Market Roundup, and Taranjeet Chumber will be moderating the CLO Investor Outlook. Stop by to listen to their insight into the state of the CLO market.
CMBS Surveillance: Recent European Special Notices
Deal Name: EURO 34
Special Notice: Servicer confirms the sale of the Faraday Close completed on 17/8/2021; As a result of this sale, an amount equal to £2,914,051.24 (being the Release Price) has been applied in mandatory prepayment of the Senior Loan. The Securitised Senior Loan has therefore been prepaid by an amount equal to £2,405,282.19 and such amount will be applied against the Notes at the Nov/2021 IPD.
The European Special Notices are originally published in our European Edition of TreppWire. If you are interested in seeing coverage of European Special Notices in your inbox every morning, click here.
Compliments of Trepp – a member of the EACCNY.