Collateralized Debt Obligations: Structures and Analysis, Second Edition

CHAPTER 4

European Bank Loans and Middle Market Loans

In this chapter we review the features of two types of loans found in collateralized loan obligations (CLOs): European bank loans (specifically, European high-yield syndicated loans) and middle market loans.

EUROPEAN BANK LOANS

European CLO (ECLO) issuance is still small in comparison to U.S. CLOs, yet from many perspectives, there are solid reasons for investors to take a closer look at ECLOs:

• For U.S. CDO investors, ECLOs provide an opportunity to diversify away from the U.S. asset underlyings.
• For U.S. and Asian corporate investors, ECLOs provide access to European corporate credit risk.
• For investors who are not “natural” Euro-investors, an ECLO provides exposure to that currency.
• For a European investor, ECLOs offer cheap EuroLIBOR floaters across the ratings spectrum.
• For all fixed income investors, floating rate instruments such as ECLOs are a good idea if interest rates rise.
• For all CDO investors, in some ways European loans are the ideal collateral for a CDO.

Here we describe the important characteristics of European loans underlying ECLOs. We begin by comparing the U.S. and European loan markets. Next, we focus on senior secured loans, covering their volume of issuance and the distribution of their issuance by country, industry, and purpose of the loan. We look at trends in the leverage and interest coverage of borrowers, loan spreads, and covenant protections. Because European mezzanine loans are an increasing ...