European CLO Strategy: Europe: The Low End of the CLO Pool

European leveraged loan prices have fallen about 2.5% year to date, lifting the share of sub-80c assets in EU CLO pools to over 7%, the highest since 2022-23. The bucket averages 6% in reinvesting CLOs and 11% in out-of-reinvestment CLOs; about 25% of deals hold more than 10% in sub-80c assets while about 9% hold less than 2%, highlighting significant dispersion. Using the sub-80c bucket as a proxy for potentially defaulting collateral, we compare it with the break-even default rate needed to break the single-B tranche; the median break-even CDR is 2.7%. Only 3% of the 711 CLOs sampled fall into the vulnerable top-left quadrant of low break-even CDR and a large sub-80c bucket. Nevertheless, we believe risk is not adequately priced, particularly in double-Bs. Spreads have widened but have more room to move; further repricing could create opportunities to buy good-quality double-Bs, while credit selection remains critical in single-Bs.