Financial Times
December 13, 2011
European credit markets are bracing for more defaults as a vital cog in the region’s deal-making and corporate lending machinery begins winding down next year.
Bankers are worried about how a wall of corporate debt set to mature in 2012 will be refinanced as the bulk of outstanding collateralised loan obligations – structured investment vehicles that buy loans made to private equity firms to finance acquisitions – goes into run-down mode.
Such CLOs have a finite life span after which they are not allowed to trade new loans for existing ones, or reinvest money received from repayments or interest on existing loans they hold.
By the end of next year, the majority of CLOs will have gone “static”. By 2014, more than 98 per cent of European CLOs will have have a reached the same point, according to a report by Standard & Poor’s.
This is expected to hurt the market’s ability to refinance an estimated €250bn of leveraged loans maturing in Europe between now and 2017, and removing a source of credit to the wider economy.
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