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.