At least half all CLOs set to hit event of default, says Wachovia

In its latest research report on CLOs - "Projecting events of default: a refined analysis of EOD and liquidation", Wachovia updates its projections of the number of CLOs that are likely to suffer an event of default.

The latest analysis takes account of the differences in documentation from one CLO to another. For example, 13% of CLOs do not include an event of default test based on par ratios. A further 22% have OC-based events of default, but they do not include haircuts for triple C assets, according to the report.

The average CLO needs to lose a further 20% of par before hitting an event of default trigger. Wachovia predicts that under its worst-case "ugly" scenario for defaults and downgrades, almost all CLOs will eat through this cushion by the end of 2010. This means that in the ugly scenario, 87% of all CLOs will hit events of default.

Under the researchers' "bad" scenario, around two-thirds of CLOs will hit an event of default. And even under the "good" scenario, around half of CLOs will trigger an event of default by 2011.