UK retail has been buffeted by negative news around a few big names, including House of Fraser, whose bonds dropped 22.5 points last week after news broke that a planned takeover of the business had been canceled, and Debenhams, whose bonds traded at a record low of 75 last Thursday on news of a downgrade from Moody’s.
The analysts add that while these two names are not prominent exposures in European CLOs, they emphasize a broad weakness in the sector that could exert pressure on managers in the near term.
The analysts point to weak reported figures in UK Consumer Discretionary and Consumer Staple for the past few months, dragged lower by a few prominent names such as New Look and Fat Face, but also consumer finance brands like New Day.
Across UK sectors pooled in European CLOs, consumer discretionary brands represent the highest exposure, with the BAML analysts noting that so far, these assets have largely retained their value.
“UK assets in CLO portfolios have performed reasonably well, and weighted average prices are at similar levels to the rest of the market,” the analysts note, adding that they estimate an average price of 98.8 for all European CLO assets compared to 98.6 for UK exposures, though they also state that Brexit and further interest rate increases by the Bank of England will introduce greater volatility in the future.
Similar to the wider primary ABS markets across Europe, August has been relatively quiet for CLO issuance.
On August 2, Morgan Stanley priced a €508.5m CLO for Credit Suisse Asset Management, Cadogan Square XII. The deal was priced at 87bp over three month Euribor for the senior class.