Fitch Ratings upgrades 39 European CLO tranches, puts 13 on positive watch

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Fitch upgrades European CLO tranches

Highlights

Fitch Ratings upgrades 39 European CLO tranches—34 by one notch, five by two—noting updates due to revised CLOs and Corporate CDOs criteria effective June 1, 2026.
Thirteen tranches from seven transactions are placed on Rating Watch Positive while Fitch awaits further amendment details, with resolution expected within six months of information receipt.
All upgraded tranches have at least two-notch rating cushions; maximum reviewed portfolio losses reach 2.1% but BDR cushions remain sufficient to support current ratings and absorb potential credit quality weakening.

Criteria changes drive tranche actions

As reported by Fitch Ratings, the rating actions are primarily driven by current portfolio performance and the agency's updated CLOs and Corporate CDOs Rating Criteria published on 1 June 2026.

Fitch says 34 tranches are upgraded by one notch and five by two notches, while all upgraded tranches remain within their existing rating categories. The reviewed transactions are European CLOs backed mainly by first-lien senior secured leveraged loans, and all remain within their reinvestment periods.

The agency says three of the 43 transactions have already amended their Fitch test matrices to align with the updated criteria, allowing the new framework to be applied directly. In those deals, all notes are affirmed except for two upgrades, and all carry Stable Outlooks.

For 10 transactions where amendments are still in progress, Fitch places 13 tranches from seven transactions on Rating Watch Positive while affirming the rest with Stable Outlooks. Fitch says those tranches could be upgraded under the new criteria without the amendments, but it needs more detail on the final terms before deciding whether the ratings are affirmed or raised, and it expects to resolve the watch status within six months of receiving the necessary information.

For the remaining 30 transactions, where no further updates on amendments are expected, Fitch applies the updated criteria using available information and assigns a mix of upgrades and affirmations, all with Stable Outlooks.

Portfolio cushions support current ratings

Fitch says its updated cash flow analysis, based on current portfolios and stressed portfolios during the reinvestment period, leaves most ratings in line with model-implied ratings. Some exceptions remain, with 24 tranches rated one notch below their model-implied ratings and five rated two notches below, reflecting what the agency describes as insufficient buffers against portfolio deterioration at higher rating levels.

According to Fitch, all upgraded notes have a rating cushion of at least two notches under current portfolios, and the Stable Outlooks on upgraded and affirmed notes reflect cushions that offset deterioration consistent with their current ratings. The maximum portfolio loss from defaults and trading across the reviewed transactions is 2.1%, yet all notes still have sufficient BDR cushions to support current ratings and absorb potential weakening in portfolio credit quality.

The agency describes overall portfolio quality across the transactions as being in the 'B' rating category, with weighted average rating factors ranging from 22.2 to 27.1. Weighted average recovery rates range from 63.4% to 66.4%, while portfolio diversification remains adequate to strong, with 138 to 231 obligors per transaction and top-10 obligor concentrations between 8.2% and 16.9%.

Fitch says downgrades could occur if losses exceed its assumptions because of unexpectedly high defaults and portfolio deterioration. It adds that upgrades may follow if portfolio credit quality remains stable and deleveraging increases credit enhancement and excess spread available to absorb losses in the remaining portfolio.

Our earlier coverage of Fitch’s rating of China Hainan Rubber Industry Group’s proposed subordinated perpetual sustainable securities explained why the notes were rated below the issuer rating, reflecting their subordinated ranking and coupon deferral features. We also highlighted Fitch’s view of the group’s leverage and liquidity profile, including the role of expected state support and funding access in underpinning the credit assessment.

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