Palmer Square European CLO 2025-1 DAC class E notes upgraded by Fitch

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Palmer Square CLO upgrade

Highlights

Fitch upgrades Palmer Square European CLO 2025-1 DAC's class E notes to BBsf from BB-sf, affirming other tranches including class A at AAAsf.
Rating action driven by Fitch's new criteria increasing the weighted average recovery rate for the transaction to 65.4% from 62.2%, positively impacting note structure.
Portfolio remains stable with CCC+ and below exposure at 1.5% versus a 7.5% limit, 0.5% defaulted assets, and robust diversification across obligors and industries.

Rating action and methodology change

As reported by Fitch Ratings, the agency upgrades Palmer Square European CLO 2025-1 DAC's class E notes to BBsf from BB-sf and affirms the remaining notes, including class A at AAAsf, class B-1 and class B-2 at AAsf, class C at Asf, class D at BBB-sf and class F at B-sf.

Fitch says the rating action reflects the impact of its updated CLOs and Corporate CDOs Rating Criteria published on 1 June 2026. Under the revised methodology, the agency's weighted average recovery rate for the transaction increases to 65.4% from 62.2%, which has a positive effect on the structure.

Fitch says the notes were not placed Under Criteria Observation in June 2026 because the CLO manager had previously indicated an intention to amend transaction documents, particularly collateral quality test matrices, to align with the updated criteria. The agency now no longer expects those amendments and therefore applies the updated criteria to the existing documentation.

Portfolio quality and protection levels

The agency says the portfolio's credit quality remains stable over the past 12 months. According to the latest trustee report dated August 2026, exposure to assets with a Fitch-Derived Rating of CCC+ and below stands at 1.5%, against a limit of 7.5%, while the transaction is 0.1% above par and holds 0.5% defaulted assets.

The CLO is passing all coverage, portfolio profile and collateral quality tests while actively reinvesting, and it has no long-dated assets in the portfolio. Fitch assesses the average credit quality of the underlying obligors at B, with a weighted average rating factor of 23.3 under its latest criteria, while about 10.5% of the portfolio is on Negative Outlook.

Recovery prospects remain supported by the asset mix, with senior secured obligations accounting for 97.5% of the portfolio. Fitch also highlights broad diversification across obligors, countries and industries, with the top 10 obligor concentration at 9.1%, no single obligor above 1.1% of the portfolio balance, and exposure to the three largest Fitch-defined industries at 28%. Given the transaction remains in its reinvestment period, the upgrade analysis is based on a stressed portfolio that assumes covenants at their limits and tests the notes against the collateral quality matrices in the transaction documents.

Our earlier coverage of Europe’s uneven growth outlook highlighted how diverging performance among major economies is shaping credit market sentiment. We noted that persistent inflation pressures, tight fiscal constraints, and shifting trade dynamics can influence borrowing conditions and credit risk across the region, with weaker economies facing greater vulnerability.

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