STRUCTURED FINANCE RESEARCH

European CLOs 2.0 Bring Greater Simplicity And Flexibility

Primary Credit Analyst: Rebecca Mun, London (44) 20-7176-3613; rebecca.mun@standardandpoors.com Secondary Contacts: Emanuele Tamburrano, London (44) 20-7176-3825; emanuele.tamburrano@standardandpoors.com Matthew Jones, London (44) 20-7176-3591; matthew.jones@standardandpoors.com

Table Of Contents
New Issues Have More Subordination For Senior Notes And Higher Overcollateralization Ratios Higher OC Event Of Default Triggers Provide More Protection To Senior Noteholders Senior Noteholders Demand Higher Spreads, Lower Leverage, And Lower Manager Fees Reinvestment And Non-Call Periods Are Shorter, And Maturity Extensions Are Constrained Stricter Controls On Subordinate Note Cancellations EU Rules Regulate Investor Capital Requirements Limited Loan Finance Leads To More Senior Secured Bonds In Pools Optional Re-Pricing Of Notes Offers A Refinancing Alternative Eligibility Criteria Simplify The Asset Pool Sovereign Risk Concerns Limit Exposure To Certain Assets Single Currency Transactions Dominate Recent European CLOs
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Table Of Contents (cont.)

Inclusion Of Corporate Rescue Loans Should Improve Recovery Disposal Of Unsaleable Assets Gives CLO Managers Another Tool Further Structural Changes Ahead? Related Criteria And Research Appendix: CLO Comparison Tables

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European CLOs 2.0 Bring Greater Simplicity And Flexibility

After a hiatus of more than five years, European collateralized loan obligation (CLO) issuance has sprung back into life in 2013, possibly signaling a longer-term recovery in this market. However, as Standard & Poor's Ratings Services observes, the CLO transactions of today are rather different from their predecessors. In the main, they contain features that reflect a stiffer regulatory regime and tighter credit conditions, but they also address some of the issues and behaviors prevalent in earlier transactions. In this article, we outline the features of European CLOs issued in 2013 (European CLOs 2.0) and compare them with the previous generation of European transactions issued before 2008 (European CLOs 1.0) and recent U.S. CLOs. While we think that this is a useful comparison, we note that based on issuance volumes, the European CLO market is two to three years behind the U.S. CLO market in terms of life cycle. In addition, although we believe that pre-crisis European CLOs generally performed well through the global financial crisis that started in 2007, we note that European CLO 2.0 transactions have greater subordination and lower leverage. As a result, we believe European CLO 2.0 transactions offer more protection to senior noteholders. We also observe the introduction of some new transaction features, such as optional tranche re-pricing and the inclusion of corporate rescue loans in collateral pools, which we believe offer increased flexibility to CLO portfolio managers. Overview European collateralized loan obligation transactions issued in 2013 embody significant differences from those of five years ago. New transactions feature greater senior subordination, higher overcollateralization ratios, and lower leverage. They also impose stricter conditions on maturity extensions. As a result, we believe the latest CLOs offer greater protection to senior noteholders than their predecessors.

In the year to June 7, six new European CLOs had priced: Cairn CLO III B.V. (Cairn), Dryden XXVII Euro CLO 2013 B.V. (Dryden), ALME Loan Funding 2013-1 Ltd. (ALME), Grand Harbour I B.V. (Grand Harbour), Carlyle Global Market Strategies Euro CLO 2013-1 B.V. (Carlyle), and GOLDENTREE CREDIT OPPORTUNITIES EUROPEAN CLO 2013-1 B.V. (Goldentree). These transactions mark the first post-crisis revival in European arbitrage CLO issuance, a market that's been largely dormant for the past five years. In reviewing these transactions, several trends have emerged that differentiate them from their pre-crisis counterparts, and some of these trends follow the example of recent U.S. CLO issuance. For example, European CLO 2.0 transactions generally have higher levels of subordination, providing credit support to the most senior notes. They also contain provisions that, in our view, provide clarity with respect to certain issues and behaviors that arose during the financial crisis. What's more, there are a number of features that reflect the current regulatory and economic environment in Europe. These include the risk retention rules under Article 122a of the Capital Requirements Directive for credit institutions, treatment of sovereign risk, and the difficulties that collateral managers face due to the dearth of

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European CLOs 2.0 Bring Greater Simplicity And Flexibility

European loan finance. Below, we highlight 13 features that differentiate the European CLO 2.0 transactions from their predecessors and, where applicable, clarify our view or analysis in relation to these features. (For a comparison of the individual European CLOs issued this year, together with a high-level breakdown of European CLO 2.0, European CLO 1.0, and U.S. CLO 2.0 transactions, please see the Appendix.)

New Issues Have More Subordination For Senior Notes And Higher Overcollateralization Ratios
To date, the European CLO 2.0 transactions that we've rated have simpler structures. They have mostly issued term debt in a single currency, and a sequential payment structure with no turbo feature and no combination notes. They also have higher credit enhancement and higher overcollateralization (OC) coverage ratios than pre-crisis CLOs, providing more protection to the senior noteholders. With the exception of Goldentree, which has a British pound sterling tranche, all the recent European CLOs are single-currency transactions with the liabilities issued in euros and any foreign exchange mismatch between the assets and the liabilities hedged via currency swaps. Perhaps in response to investor concerns and/or in part due to changes in rating agency criteria, European CLO 2.0 transactions, as in the U.S., typically exhibit higher subordination: In today's transactions, the 'AAA' rated tranches typically have 40% credit enhancement, compared with 30% pre-crisis. The average OC coverage ratio for the latest European CLOs is in excess of 140%, versus the typical 120% seen in European CLO 1.0 transactions. Among the six recent European CLOs, Goldentree, which is a multicurrency transaction, has the highest OC coverage ratio at 160%, with the ratios for the single-currency transactions falling between 129% and 150%. The average reinvestment diversion ratio test currently stands at 114%, compared with the typical 105% seen pre-crisis. This average excludes ALME and Grand Harbour, which do not have such a test.

Higher OC Event Of Default Triggers Provide More Protection To Senior Noteholders

All of the recent European CLOs that we've seen trigger an event of default if the senior OC coverage ratio falls below 102.5%. The European CLO 1.0 transactions had a 100.0% overcollateralization ratio trigger, although some were calculated with ratings-based haircuts. Such haircuts meant an increased likelihood of an event of default if the portfolio experienced significant downward rating migration. In recent transactions, the event of default OC coverage ratio is calculated with haircuts for defaulted assets (to reflect the market value), but without any ratings-based haircuts. However, while a higher OC trigger offers greater benefit to the most senior class, it could potentially raise a conflict of interest between the controlling class and the more subordinate noteholders. In our analysis of 2013 CLO transactions, we obtain structural comfort in two ways: First, from having the acceleration and enforcement subject to a resolution from every class of notes that form part of the

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European CLOs 2.0 Bring Greater Simplicity And Flexibility

OC trigger. Second, from our analysis that the trigger is at a level low enough such that the liabilities affected by either acceleration or liquidation of the transaction would fail the test at their rating levels. In all the recent European CLOs, acceleration and enforcement is subject to ordinary resolution by the controlling noteholders.

Senior Noteholders Demand Higher Spreads, Lower Leverage, And Lower Manager Fees
Post-crisis, senior noteholders are generally demanding higher spreads, averaging 133 basis points (bps) in the recent European CLOs that we've rated. Although spreads may continue to tighten, they remain significantly higher than the more typical 30 bps in the European CLO 1.0 transactions. The average leverage ratio for recent European CLO transactions is 5.8x, which is lower than that in pre-crisis European transactions we have observed, with the equity tranche ranging between 12% and 20% versus less than 10% pre-crisis. However, we note that with the exception of Goldentree, leverage is increasing on the more recently priced transactions. We also observe that the manager's incentive fee in post-crisis European CLOs is lower than in the U.S. and pre-crisis European counterparts--10% versus 20%, for example.

Reinvestment And Non-Call Periods Are Shorter, And Maturity Extensions Are Constrained
Recent European CLOs feature reinvestment and non-call periods of three and two years, respectively. This contrasts with pre-crisis CLOs that typically had a reinvestment period of six to seven years and a non-call period of three to five years. The shorter non-call period gives equity investors greater flexibility should returns not meet their expectations. This optional redemption event is subject to certain conditions. In recent transactions, amendments to extend the maturity of existing loans have provided an attractive alternative to refinancing existing corporate debt. As in the U.S., pre-crisis CLO transaction documents tended to be silent on the treatment of amend-to-extend (A-2-E) transactions. This meant that some collateral managers could adopt a less-restrictive interpretation, sometimes leading to a build-up of long-dated assets (that is, assets that mature after the legal final maturity of a CLO's notes) in transaction collateral pools. Such a build-up could potentially lead to a market value risk if a collateral manager is forced to sell these assets for less than par to redeem the CLO's notes. European CLO 2.0 transactions have resolved this issue through specific provisions in the transaction documents. In all of the transactions that we've seen, the collateral manager may vote on the issuer's behalf in favor of any waiver, amendment, or modification that would extend the maturity date of the assets in question. Typically, however, the collateral manager is only allowed to vote in favor of such an extension if the extended maturity of the asset is no longer than the maturity date of the rated notes. Alternatively, the collateral manager can vote in favor provided that the portfolio as a whole does not exceed the proportion of long-dated assets that the CLO can hold (5% in the case of Dryden) and the weighted-average life is satisfied. Lenders are generally compensated following an A-2-E transaction with an upfront amendment fee, as well as an

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European CLOs 2.0 Bring Greater Simplicity And Flexibility

increase in the obligation's loan spread margins. In a number of pre-crisis CLOs, such upfront fees may have either been disbursed into the CLO's waterfall, specified in the transaction documentation, or paid directly to the collateral manager outside the waterfall. Now, however, we understand that all such fees are paid directly into the issuer's interest account and disbursed through the payment account in accordance with the transaction's payment priorities.

Stricter Controls On Subordinate Note Cancellations

During the credit crisis, we saw in a small number of CLOs where the same party held both the junior notes and equity, the purchase and cancellation of junior notes at a discount in order to avoid overcollateralization test failures. This prevented the OC tests from working properly and redirected cash flows that would otherwise have been used to pay down the senior notes to both the junior notes and equity. We note that European CLO 2.0 transactions explicitly state that no note may be surrendered except for payment as provided for cancellation pursuant to note purchases; registration of transfer, exchange or redemption; or replacement in connection with any note mutilated, defaced, or deemed lost or stolen. Note purchases are subject to certain conditions, including that they have to be purchased in a sequential order. Furthermore, the transaction documents only permit redemption in part through refinancing (that is, through the issuance of an additional class of notes).

EU Rules Regulate Investor Capital Requirements

Article 122a of the EU's Capital Requirements Directive (CRD) includes a so-called "skin in the game" rule for securitizations, including CLOs. It means that European credit institutions that purchase CLO securities will likely prefer transactions where the original lender, originator, or sponsor of the CLO (or an appropriate transaction party whose interests are aligned with those of investors) retains a material net economic interest of at least 5%. For non-compliant transactions, banks investing in CLOs would incur higher regulatory capital charges. On May 22, 2013, the European Banking Authority (EBA) published a consultation paper including details of risk retention requirements in the new Capital Requirements Regulation (CRR), which replaces the CRD on Jan. 1, 2014. We note that this paper has raised new questions among market participants over how CLOs in particular can comply with the risk retention guidelines. In the Cairn and ALME CLOs, both of which were issued prior to the EBA paper, 5% of the transaction's capital structure is held by a third-party equity provider that has a say over the management of the portfolio and any decisions made by the collateral manager. This gives the provider the right to veto changes to the eligibility criteria, reinvestment criteria, portfolio profile tests, collateral quality tests, and the appointment of a replacement investment manager. Having the 5% held by an investor on the collateral manager's behalf, with a commitment to not sell, hedge, or mitigate the credit risk associated with the CLO, allowed the transactions to be Article 122a-compliant in the view of the transaction counsel. In Dryden, on the other hand, the CLO manager--Pramerica Investment Management Ltd.--opted to retain some risk directly, in this case via a 5% vertical slice of the capital structure. Since the publication of the EBA consultation paper, three more European CLOs have been issued or priced--Grand

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European CLOs 2.0 Bring Greater Simplicity And Flexibility

Harbour, Carlyle, and Goldentree. Of these three, Carlyle is currently the only confirmed CRR-compliant transaction as per the EBA paper through a 5% equity retention by the manager. By contrast, we understand that Goldentree was the first post-crisis CLO not to comply with the existing Article 122a retention rules, given what we understand to be a non-European target investor base, unaffected by European bank capital rules. Our rating methodology does not address the impact to the noteholders if the securities cease to be compliant with the requirements of Article 122a of the CRD or the future CRR. However, a new feature that we've seen in transactions such as Cairn and ALME is the addition of a mandatory redemption event should the retention holder no longer hold an economic interest of at least 5% (that is, a so-called retention deficiency event). Under such conditions, the notes will be redeemed using principal proceeds on the following payment date, and each payment date thereafter on a sequential basis, until the retention deficiency is addressed.

Limited Loan Finance Leads To More Senior Secured Bonds In Pools

One of the main post-crisis challenges facing the European CLO market--in contrast with the U.S. market--has been the lack of new loan supply as well as a lack of refinancing for existing CLO transactions. Spreads on some early post-crisis U.S. CLOs issued in 2010 were wider than for transactions issued in 2013, so equity holders may have an incentive to call those early transactions, often leading to new transaction flow. This is not the case in Europe, where current CLO spreads remain wider than in most existing transactions. In addition, the market value of the assets is also lower than that required to pay the liabilities at par plus accrued interest if the transaction were to be called. As a result, collateral managers in Europe generally face greater challenges in sourcing collateral. In all the transactions that we've seen in 2013, the collateral manager has six months to fully ramp-up to the target collateral par. This is greater than the three months we generally see for U.S. transactions, although not very different from European CLO 1.0 transactions. In our ratings analysis of the transactions, we consider negative carry for the ramp-up period. In recent European CLOs, we've started to see larger allowances for senior secured bonds in the portfolio. In European CLO 1.0 transactions, we generally saw a minimum proportion of 90% senior secured loans and a maximum allowance of 5% for fixed-rate assets. Cairn and ALME, for example, both restrict the portfolio manager to a minimum of 90% senior secured loans, although ALME allows a maximum bucket of 10% fixed-rate assets. Dryden, on the other hand, has a minimum proportion of 75% senior secured loans or bonds, as well as a minimum concentration of fixed-rate assets of 20% and a maximum concentration of 40% without any additional hedging. (The transaction is partially hedged by fixed-rate tranches making up 30% of the capital structure.) This trend of issuing fixed-rate notes and a large bucket for fixed-rate assets continues with Carlyle and Goldentree, with fixed-rate tranches making up between 13.0%-17.5% of the capital structure and a maximum bucket of fixed-rate assets ranging between 20.0%-40.0%. We see advantages and disadvantages to allowing a larger proportion of senior secured bonds in the transaction. It increases the pool of assets from which the collateral manager can select, which partially mitigates the risk of being unable to source suitable assets. However, our recovery assumptions for senior secured bonds are generally lower than for senior secured loans. This can be attributed to a number of reasons such as bank loans being generally subject

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European CLOs 2.0 Bring Greater Simplicity And Flexibility

to workouts between the lender and obligors. Bank loans also benefit from tighter covenant restrictions and closer scrutiny by lenders, including reviews of covenant compliance statements and collateral reports. In our analysis of the aforementioned transactions, we consider the higher proportion of senior secured bonds that can be potentially included in the portfolio to be reflected in the lower covenanted recovery rates in the respective transactions. Since most bonds are issued with fixed coupons, the inclusion of a higher proportion of bonds introduces an element of interest rate risk, in our view. Dryden, Carlyle, and Goldentree partially hedge this risk by issuing fixed-rate liabilities (although the transactions also allow for the possibility of entering into interest rate hedges that meet our counterparty criteria). In our analysis, we model the mix of fixed- and floating-rate assets at the maximum and minimum levels. We also bias defaults toward fixed-rate assets during low interest-rate environments and toward floating-rate assets during high interest-rate environments. The implication of the additional stresses is that the transaction may require greater credit enhancement. This, together with the increased challenge for the collateral manager in maintaining the minimum covenanted recovery rate, is the compromise that the collateral manager has to make in exchange for greater flexibility.

Optional Re-Pricing Of Notes Offers A Refinancing Alternative

As with U.S. CLOs, one of the new features that we've observed in recent European CLOs is the ability of the issuer to refinance and re-price its liabilities by issuing lower-spread tranches if the prevailing market spreads for assets and liabilities fall. This is applicable for any class of notes and is generally directed by the subordinated noteholders on any payment date after the non-call period. The re-pricing feature offers a quicker and cheaper alternative to refinancing. In the U.S., we've seen a limited number of re-pricings of early U.S. CLO 2.0 transactions to take advantage of the lower spread environment. For example, Oak Hill Advisors' 2011-vintage Intrepid Leveraged Loan Fund saw the spread on the 'AAA' tranche reduced to 92 bps from 150 bps. In the transactions that we've rated, optional re-pricing can only take place subject to various conditions. Among others, these conditions include Standard & Poor's being notified of the re-pricing and there being sufficient excess interest proceeds to make all payments according to the interest priority of payments. Under the transaction documents, notification is provided to all the holders of the class of notes subject to re-pricing. Any noteholder that does not consent to a re-pricing will have their notes sold and transferred at a price equal to 100% of the principal amount outstanding, together with any accrued and unpaid interest up to the re-pricing date. We consider this feature to be similar to the traditional call feature because the noteholders are repaid at par plus accrued interest.

Eligibility Criteria Simplify The Asset Pool

Perhaps in response to investor concerns, recent European CLOs prohibit the purchase of structured finance obligations and synthetic securities. In addition, most of the recent European CLOs do not allow for the purchase of long-dated obligations. However, one observation we've made when comparing the eligibility criteria in relation to U.S. CLO 2.0 transactions is that there are no specific restrictions dealing with the inclusion of covenant-lite loans.

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(Covenant-lite loans are loans that typically contain fewer financial covenants for the lending party's benefit, or do not require continued compliance with one or more financial covenants.) By contrast, there is an average maximum bucket of 50% for recent CLOs issued in the U.S. where such obligations are more prevalent. In our analysis, we use reduced recovery rates to reflect the lower expected recoveries if any covenant-lite loans default. As with the inclusion of senior secured bonds, the collateral manager is therefore faced with the task of maintaining the minimum covenanted recovery rate in light of the lower recovery rates we assume for such assets.

Sovereign Risk Concerns Limit Exposure To Certain Assets

In recent years, the European sovereign debt crisis has led us to lower our sovereign credit ratings on a number of countries including Greece, Italy, Ireland, Portugal, and Spain. To address the sovereign risk in lowly rated countries, we note that all the European CLO 2.0 transactions that we've rated to date limit the exposure of assets in countries rated lower than 'A-' to 10% of the collateral pool.

Single Currency Transactions Dominate Recent European CLOs

With the exception of Goldentree, recent European CLOs are all single-currency transactions, with all the liabilities in fully funded euro-denominated tranches. Furthermore, all the transactions allow the collateral manager to purchase non-euro-denominated obligations provided that the foreign exchange risk is fully hedged--in other words, a currency swap is entered into at the time of the acquisition of the asset. To account for the difficulty that collateral managers may have in entering into a swap for a primary asset, some transactions have a maximum bucket of 5% of unhedged obligations, subject to a number of conditions. These conditions include that the asset is purchased on the primary market and denominated in liquid currencies (such as sterling, U.S. dollars, Danish krone, Norwegian krone, Swedish krona, and Swiss francs). In addition, there is a limit of six months on the maximum period that the obligation can be unhedged, and the transactions stipulate that a par maintenance condition is achieved.

Inclusion Of Corporate Rescue Loans Should Improve Recovery

One of the features that we've seen in a number of European CLO 2.0 transactions is that the portfolio manager can purchase corporate rescue loans. These loans cover: Debtor-in-Possession (DIP) loans made to distressed companies under Chapter 11 of the U.S. Bankruptcy Code, and which have the priority pursuant to Section 365(c) and 365(d) of the Code; and Refinancing loans extended to distressed obligors undergoing restructuring and which have a super senior priority to existing lenders. While DIP loans were a common feature in European CLO 1.0 transactions, the inclusion of corporate rescue loans are a new feature of European CLO 2.0 transactions. We understand that this development is in response to the experience of collateral managers during the financial crisis. In our view, the ability of the collateral manager to participate in such transactions would allow the issuer to improve its recovery prospects on existing distressed exposures.

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Since the obligor is likely to be rated 'D' (Default) or 'SD' (Selective Default) at the time of the purchase, we treat such loans as a defaulted obligation to the earlier of the receipt of a credit estimate or a public issuer credit rating on the restructured obligor. If there is no Standard & Poor's rating after three months, the principal balance of the asset is carried at zero. We note that the fees received in relation to the purchase of such assets are allocated to the principal account.

Disposal Of Unsaleable Assets Gives CLO Managers Another Tool

Unlike European CLO 1.0 transactions, new European CLOs allow the issuer to dispose of unsaleable assets following an optional redemption in whole or an acceleration of the notes following an event of default. The collateral manager is permitted to auction off such assets to noteholders and, in the absence of any interest from the noteholders to purchase them, to dispose of the assets by donation to a charity. This provision avoids the issue of not being able to terminate transactions at maturity after all the other assets in the portfolio have been sold.

Further Structural Changes Ahead?

In summary, we believe that the higher level of subordination, lower leverage, and higher overcollateralization test ratios seen in recent European CLO 2.0 transactions offer greater protection to senior noteholders. These transactions borrow what we consider to be some useful features from their U.S. CLO 2.0 counterparts, such as the re-pricing mechanism and the treatment of unsaleable assets. They have a simpler asset composition with the removal of structured finance and synthetic securities, but at the same time increase the level of flexibility available for collateral managers with the inclusion of larger fixed-rate buckets. Looking ahead, we believe there could be further structural changes in response to changes in the regulatory framework. Depending on both senior noteholders' appetite and equity investors' target returns, we could potentially see transactions with lower spreads and higher leverage, but this could depend on the volume and pricing of new primary loan origination. Other developments could include more multicurrency transactions, as managers seek to broaden the investor base and include non-euro assets in collateral pools.

Related Criteria And Research

The articles listed below are available on RatingsDirect.

Related Criteria
Counterparty Risk Framework Methodology And Assumptions, Nov. 29, 2012 Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011 Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs, Sept. 17, 2009 Revised CDO Current-Pay Criteria Assumptions For Corporate Debt When Issuers Announce A Distressed Exchange Or Buyback, May 18, 2009 Methodology For Analyzing CDO Transactions That Purchase Their Own Discounted Debt, April 29, 2009

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European CLOs 2.0 Bring Greater Simplicity And Flexibility European Legal Criteria For Structured Finance Transactions, Aug. 28, 2008 The Use Of Rating-Based Haircuts In Event Of Default Overcollateralization Tests For CDOs, March 19, 2008 Qualification And Treatment Of Current-Pay Obligations In Global Cash Flow CLOs, July 11, 2007

Related Research
Presale: Carlyle Global Market Strategies Euro CLO 2013-1 B.V., May 31, 2013 New Issue: Grand Harbour I B.V., June 5, 2013 New Issue: ALME Loan Funding 2013-1 Ltd., May 15, 2013 European CLOs: Life After The Reinvestment Period, May 14, 2013 New Issue: Dryden XXVII Euro CLO 2013 B.V., May 9, 2013 European CLO Performance Index Report Q1 2013: 2013 Sees The Reemergence of Primary European CLOs Following Positive Ratings Migration In 2012, April 25, 2013 New Issue: Cairn CLO III B.V., March 20, 2013 CDO Spotlight: CLO Issuance Is Surging, Even Though The Credit Crisis Has Changed Some Of The Rules, Aug. 9, 2012 CDO Spotlight: The Relationship Between Long-Dated Assets And Market Value Risk In U.S. Cash Flow CLOs, April 26, 2012

Appendix: CLO Comparison Tables

The following two tables give an overview of the various European CLO transactions issued in 2013, together with information on liability, structural features, a summary of the collateral quality tests, concentration limitations, and details of the portfolio managers' fees. Table 1 provides a transaction-by-transaction comparison between the European CLOs issued and priced in 2013. Details of transactions to which we have assigned preliminary ratings is based on the information we've received as of June 10, 2013. Table 2 provides a comparison between a typical European CLO 2.0 transaction, a U.S. CLO 2.0 transaction, and a European CLO 1.0 transaction. References to European CLO 2.0 and U.S. CLO 2.0 refer to European and U.S. CLOs that were issued in 2013, whereas European CLO 1.0 refers to a composite of European CLOs issued between March and December 2007.
Table 1

Comparison Of Rated European CLO Transactions Issued In 2013

Carlyle Global Market Strategies Euro CLO 2013-1 B.V.* CELF Advisors LLP Goldentree Credit Opportunities European CLO 2013-1 B.V./Goldentree Credit Opportunities European CLO 2013-1 LLC* GoldenTree Asset Management LP

Transaction Manager

Cairn CLO III B.V. Cairn Capital Ltd.

Dryden XXVII Euro CLO 2013 B.V. Pramerica Investment Management Ltd.

ALME Loan Funding 2013-1 Ltd. Apollo Credit Management (CLO), LLC

Grand Harbour I B.V. Blackstone/GSO Debt Funds Europe Ltd. Citigroup Global Markets Ltd.

Arranger

Credit Suisse Securities (Europe) Ltd.

Barclays Bank Citigroup Global PLC Markets Ltd.

Barclays Bank PLC

Morgan Stanley

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Table 1

Comparison Of Rated European CLO Transactions Issued In 2013 (cont.)

Transaction overview Closing date Type Payment frequency Target par (mil. ) Notes issued (mil. ) Reinvestment (RI) period (years) Non-call period (years) Max WAL (after RI period; years) Notes Senior class credit enhancement (%) Senior class spread (bps) Size of equity tranche (mil. ) Size of equity tranche (based on transaction balance; %) Leverage ratio (total issued debt/equity; x) Fixed-rate tranches (%) Structure Senior OC test required (A/B; %) Reinvestment test (%) Class A OC EoD (%) Min. WAS (%) Min. WAC (%) Max. WAL (years) Min. WARR ('AAA' tranche; %) Concentration limitations Obligations that pay interest less frequently than liabilities (%) Min. senior secured (%) 5.0 0.0 5.0 5.0 0.0 10.0 134.2 120.7 102.5 4.2 N/A 7.0 38.8 136.4 113.5 102.5 4.3 7.0 7.0 33.5 137.4 None 102.5 4.0 6.5 7.0 37.0 149.4 None 102.5 4.0 6.5 7.0 37.0 129.3 108.0 102.5 4.1 6.0 8.0 35.5 160.4 120.9 102.5 3.5 7.0 8.5 39.0 39.50 140 60.0 20.0 41.8 135 51.0 17.0 40.0 130 45.1 14.0 40.0 130 48.4 12.0 38.9 130 42.0 12.0 55.0 135 59.0 19.0 March 20, 2013 Single currency Semiannual 300.0 300.5 3.0 2.0 4.0 May 9, 2013 Single currency Semiannual 291.0 300.0 3.0 2.0 4.0 May 15, 2013 Single currency Semiannual 325.0 334.2 3.0 2.0 4.0 June 5, 2013 Single currency Semiannual 400.0 403.4 3.0 2.0 4.0 TBA Single currency Semiannual 343.6 350.0 3.0 2.0 5.0 TBA Multicurrency Semiannual 300.0 303.0 4.0 2.0 4.5

4.0

4.9

6.4

7.3

7.3

4.1

0.0

30.0

0.0

0.0

13.3

17.5

90.0

75.0

90.0

90.0

90.0

80.0

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Table 1

Comparison Of Rated European CLO Transactions Issued In 2013 (cont.)

Min. senior secured (type) Max. nonsenior secured (%) Min. fixed-rate assets (%) Max. fixed-rate assets (%) Max. covenant-lite loans (%) Max. current pay obligations (%) Max. DIP/Corporate rescue loans (%) Max. project finance loans (%) Max. synthetic securities (%) Max. structured finance (%) Max. long-dated assets (%) Max. unhedged non-euro assets (%) Max. obligors in countries rated below 'A-' (%) Loans only 10.0 N/A 5.0 No limit 5.0 5.0 (DIP loan) Loans and bonds 25.0 20.0 40.0 No limit 5.0 5.0 (Corp. rescue loan) 10.0 0.0 0.0 5.0 5.0 Loans only 10.0 N/A 10.0 No limit 5.0 5.0 (DIP loan) Loans and bonds 10.0 N/A 10.0 No limit 5.0 5.0 (Corp. rescue loan) 0.0 0.0 0.0 0.0 0.0 Loans and bonds 10.0 3.0 18.0 No limit 5.0 5.0 (Corp. rescue loan) 0.0 0.0 0.0 0.0 2.5 Loans and bonds 20.0 N/A 40.0 No limit 5.0 7.5 (DIP loan)

0.0 0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0 0.0

5.0 0.0 0.0 2.0 N/A

10.0

10.0

10.0

10.0

10.0

10.0

Required return to equity/Collateral manager fees Senior management fee (%) Subordinated management fee (%) Equity hurdle rate (%) Incentive management fee (%) 0.15 0.15 0.15 0.15 0.15 None

0.35

0.35

0.35

0.35

0.35

None

12.00 10.00

12.00 10.00

12.00 10.00

None None

12.00 10.00

None None

*Based on information received as of June 10, 2013. Subject to a number of conditions. No management fees as long as GoldenTree Asset Management is the collateral manager. TBA--To be advised. OC--Overcollateralization. EoD--Event of default. WAS--Weighted average spread. WAC--Weighted average coupon. WAL--Weighted average life. WARR--weighted average recovery. DIP--Debtor-in-possession. bps--Basis points. N/A--Not applicable.

Table 2

Comparison Of CLO Transaction Features Pre- and Post-Financial Crisis

European CLO 2.0 2013 Weighted Average Transaction overview Transaction type Mostly single currency Single/Multi-currency European CLO 1.0*

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European CLOs 2.0 Bring Greater Simplicity And Flexibility

Table 2

Comparison Of CLO Transaction Features Pre- and Post-Financial Crisis (cont.)

Payment frequency Target par (mil. /$) Notes issued (mil. /$) Reinvestment (RI) period (years) Non-call period (years) Max WAL (after RI period) Notes Senior class credit enhancement (%) Senior class spread (bps) Size of equity tranche (mil. /$) Size of equity tranche (based on transaction balance; %) Leverage ratio (total issued debt/equity; x) Fixed-rate tranches (%) Structure Senior OC test required (A/B; %) Reinvestment test (%) Class A OC EoD (%) Minimum covenants Min. WAS (%) Min. WAC (%) Max. WAL (years) Min. WARR ('AAA' tranche) Concentration limitations Obligations that pay interest less frequently than liabilities (%) Min. senior secured (%) Min. senior secured (type) Max. non senior secured (%) Min. fixed-rate assets (%) Max. fixed-rate assets (%) Max. covenant-lite loans (%) Max. current pay obligations (%) Max. DIP/Corporate rescue loans (%) Max. project finance loans (%) Max. synthetic securities (%) Max. structured finance (%) Max. long-dated assets (%) Max. unhedged non-euro assets (%)* Max. obligors in countries rated below 'A-' (%) Required return to equity/Collateral manager fees Senior management fee (%) 0.13 0.17 4.1 86.2 Mainly loans and bonds 13.8 3.5 19.7 No limit 5.0 5.3 2.3 0.0 0.0 1.0 1.2 10.0 5.0 86.0 Mainly loans only 14.1 N.A. 4.4 Generally no limit 3.7 0.7 Either silent or zero 16.5 0.7 2.7 0.8 No limit 4.0 5.6 7.4 36.8 2.6 N.A. 9.9 53.6 141.3 113.8 102.5 120.9 104.5 100.0 42.3 133.0 50.5 15.4 5.8 9.5 30.6 31.9 33.1 9.4 9.8 0.0 Semiannual 326.6 331.8 3.2 2.0 4.3 Mainly semiannual 337.3 347.1 6.3 4.0 3.6

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Table 2

Comparison Of CLO Transaction Features Pre- and Post-Financial Crisis (cont.)

Subordinated management fee (%) Equity hurdle rate (%) Incentive management fee (%) 0.35 12.00 10.0 0.44 11.75 17.3

*Data cover a sample of transactions between March and December 2007. OC--Overcollateralization. bps--Basis points. EoD--Event of default. WAS--Weighted average spread. WAC--Weighted average coupon. WAL--Weighted average life. WAR--Weighted average recovery. DIP--Debtor-in-possession. N.A.--Not applicable.

Additional Contact: Structured Finance Europe; StructuredFinanceEurope@standardandpoors.com

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