It is undeniable that 2020 was a very challenging year in many respects. The Covid-19 outbreak played the leading role globally. We have seen its impact on the corporate sector and, consequently, on the overall financial markets first hand.
Our year-in-review touches upon the main events and trends observed in the European CLO, CRE, and CMBS space throughout 2020.
How Did the CLO Market Fare in 2020?
The Covid-19 outbreak produced an unprecedented negative shock to businesses globally, with repercussions on both leveraged loan and CLO markets.
Overall, CLO debt tranches were relatively insulated from a market and credit risk perspective thanks to a combination of factors such as deals’ credit enhancement, manager’s trading activity and the recovery in the underlying leveraged loan market. Here we have highlighted some of the key developments observed in the CLO market.
Early in the year, both the leveraged loan and CLO markets experienced significant price corrections on the back of fundamental and technical factors.
Later on, in November, the market saw the first European CLO switch from quarterly to semi-annual payments to address a mismatch between the payment frequency of loans vs. bonds. This update to payment frequency was a response to the challenges faced throughout the pandemic and this is an aspect worth monitoring over the next months.
In the primary market, managers adapted to the new environment with features such as static deals, shorter non-call and reinvestment periods, and print-and-sprint deals. In addition, mechanisms that allow managers to play an active role in restructurings of underlying borrowers were introduced in new deals, already present in the US market.
By the year-end, new issue spreads on AAA notes had reached their post-March tightest levels (105-110bps) also on the back of positive vaccine news. Overall, according to S&P Global, new European CLO issuance declined by 26% to €22 billion in 2020, after four years of growth.
Last but not least, in 2020 the market was met with the continuation of the trend of managers issuing CLO deals with ESG eligibility criteria, a trend that is anticipated to increase in 2021.
A Review of the European Commercial Real Estate Market
Given the impact of the coronavirus on travel, work, school and dining out, it is no surprise that the CMBS and commercial real estate markets were not spared either. According to S&P Global, European CMBS volumes fell back to less than €2 billion in 2020, with only five transactions closing.
According to CBRE data cited by the CRE Herald, CRE investment volumes in Europe decreased by 17%, from €331 billion in 2019 to €275 billion in 2020. Germany reportedly saw the highest level of investment in Europe, followed by the UK, and then France. Interestingly, the Nordic countries also had strong investment performance. As the team has has discussed a number of times on TreppTalk, the industrial sector fared well, and CRE Herald reports an increase in investment by 6%.
Hotels saw the biggest decreased in investment which is hardly surprising given the way the pandemic has restricted both business and leisure travel.
Among the sectors most negatively affected was retail, as we have discussed a number of times, in particular the traditional bricks-and-mortar players already challenged by the competition of online retailers. Very familiar household names made the headlines as Arcadia, a retail empire with more than 10000 employees and that includes brands such as Topshop, entered in administration in December. This then had an impact on Debenhams, who entered into administration earlier in the year, leading the administrators to decide to close all the shops in the UK after 242 years in business. Online fashion brand Boohoo purchased Debenhams online business in January 2021.
Against this backdrop, there still were still some positive CRE headlines. IKEA expressed interest in investing in commercial properties in European big-city centers as part of their strategy to move away from out-of-town locations. In addition, large UK retailers such as John Lewis, Marks and Spencer, and House of Fraser showed interest in converting some of their retail spaces to other purposes, mainly offices, in the face of the challenges to their business models.
To Sum it all Up
As is clear, 2020 was a year like no other, and the impact of the pandemic was seen across all areas of structured finance in Europe and the rest of the world.
While headlines have been primarily negative when relating to a few major areas of the CRE industry, there has been some resilience, especially in the healthcare, industrial, and self-storage industries. We have also seen the adaptation of several industries, most notably with more and more CLO managers shifting toward ESG eligibility criteria. We will be continuing to monitor all European CRE, CLO, and CMBS headlines and trends throughout 2021 with our European Market Update.
- Andrea Tortora
Compliments of Trepp, LLC – a member of the EACCNY.