CLO OC failures fall by 30%, says Wells Fargo

Wells Fargo calculates that the number of US CLOs failing senior overcollateralisation tests has now fallen for four months in a row – from a high of 56 in April to 40 last month. As analyst Dave Preston notes, that represents a 30% decrease in the number of deals failing this key test. Over the same period, the number of deals failing at least one overcollateralisation test has fallen from 351 to 340.

The bank’s latest structured products research report also includes a figure for the proportion of CLO assets held in CLOs. The average deal has a 1.4% holding of other CLOs, with those from the 2006 and 2007 vintages having some of the highest CLO concentrations at 1.8% each. The report notes that CLOs have bought CLO tranches as a way to increase their credit quality in rating terms and build par, though at the expense of losing some coupon income.