Credit agency Fitch predicts that ratings volatility in the global collateralised debt obligation market is likely to continue this year, according to its latest report, ‘Global CDO Quarterly’.The report also noted the different characteristics of the European and US markets last year. Around 94% of US CDO downgrades in 2002 were based on investment-grade corporate and high-yield bond CDOs. A deterioration in credit quality also resulted in a significant number of downgrades in the European market, though largely in the below-investment-grade sector.
While Fitch believes US high-yield collateral default rates have peaked, even with a decline they are likely to remain higher than historical average levels in the near future. It expects CDO performance in the US to vary according to collateral type this year, with difficulties remaining in investment-grade corporate and high-yield bond CDOs.
In Europe, Fitch noted a shift towards greater use of leveraged loans as collateral, which it attributed to higher recoveries and the deeper supply of the asset than in the US. This represents a move away from the traditional high-yield bond markets, where recovery is low and defaults have historically been problematic, leading to negative rating actions on some cashflow arbitrage deals in 2002, with more expected in 2003.
Fitch also predicts further credit deterioration for European leveraged loan CLOs and investment-grade corporate CDOs.
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