Evaluating the impact of European policy shifts on CLOs
As Germany embarks on boosting fiscal spending, Portfolio Managers Denis Struc and Ian Bettney take a deep dive into CLOs, how the asset class is poised to benefit, and why a robust credit approach is essential.
![Denis Struc](https://www.janushenderson.com/wp-content/uploads/sites/4/Headshot-thumbnail_Denis-Struc.png?w=150")
![Ian Bettney](https://www.janushenderson.com/wp-content/uploads/sites/4/Headshot-thumbnail_Ian-Bettney.png?w=150")
5 minute read
Key takeaways:
- The CLO market currently has circa 8% exposure to a diverse range of German corporates, particularly in manufacturing, technology, and healthcare, showing stable fundamentals with potential to benefit from fiscal expansion.
- With over 30% exposure in the Eurozone and nearly 10% in the UK, companies within the European CLO universe are likely to experience positive impacts from Germany’s fiscal expansion and potentially similar economic measures across Europe.
- Amid fiscal spending concerns possibly spiking inflation, CLO managers’ critical role in credit risk analysis and opportunity identification is vital for portfolio performance. The interest rate rise post-Germany’s announcement underscores floating-rate CLO bonds’ resilience and benefits for fixed income portfolios.
Germany’s fiscal expansion
Within the broader financial landscape, the fundamental credit within Collateralised Loan Obligations (CLOs) can be influenced by macroeconomic policies and fiscal shifts. As Germany embarks on a significant pivot in its fiscal policy, emphasising enhanced expenditure on defence and infrastructure, the ramifications for corporate borrowers within CLO portfolios warrant closer analysis.
Such a fiscal stance, diverging from Germany’s traditionally conservative budgetary practices, heralds a potential uplift in Germany’s economic trajectory. However, it also introduces a complex layer of considerations for investors and analysts closely monitoring the performance and stability of corporate borrowers in a changing economic landscape.
In this analysis, we focus on the industries and sub-industries that may directly benefit from German fiscal expansion, such as manufacturing, construction, chemicals, aerospace and defence, transportation, telecommunications as well sub-sectors within technology. However, given the magnitude and urgency of economic expansion driven by national and global geopolitical developments, other industries such as paper and packaging, parts of healthcare (namely biotechnology and pharmaceuticals), as well as broader commercial service sectors, may also stand to benefit.
Potential ramifications for CLO portfolios
Within the CLO universe, German corporates currently account for approximately 8% of exposure[1]. This includes 50 companies domiciled in Germany, with a broad range of industry exposure as shown in Figure 1 below. Notably, the manufacturing sector, which is involved in the production of diversified machinery and other manufacturing types, constitutes about 23% of this exposure. Within the technology sector, companies in the software sub-sector make up around 13%. Healthcare, specifically pharmaceutical companies, represents 18% of the exposure within the overall sector and may be indirectly impacted by expansionary economic activities.
From a fundamental credit perspective, the exposure to German corporates within CLOs is considered relatively stable. However, some sub-sectors that have faced challenges with stagnant revenue growth and low EBITDA margins may stand to benefit from fiscal expansion and increased government spending.
Figure 1: Exposure of specific sectors in the CLO universe to corporations domiciled in Germany
| Sector and sub-sector | Germany | |
| % of CLO universe | % of sub-group | |
| Healthcare | 2.3% | 29.0% |
| Biotechnology | 0.0% | |
| Healthcare Products | 0.2% | 2.6% |
| Healthcare Services | 0.7% | 8.3% |
| Pharmaceuticals | 1.4% | 18.1% |
| Services | 1.8% | 22.8% |
| Commercial Services | 1.8% | 22.8% |
| Storage and Warehousing | 0.0% | |
| Media & Telecom | 0.2% | 2.2% |
| Media | 0.2% | 2.2% |
| Telecommunications | 0.0% | |
| Technology | 1.4% | 17.5% |
| Computers | 0.0% | |
| Electronics | 0.3% | 4.2% |
| Semiconductors | 0.0% | |
| Software | 1.1% | 13.4% |
| Chemicals | 0.2% | 2.8% |
| Chemicals | 0.1% | 1.7% |
| Other Chemical Manufacturing | 0.1% | 1.2% |
| Manufacturing | 1.8% | 22.9% |
| Electrical Equipment | 0.1% | 0.9% |
| Hand and Machine Tools | 0.2% | 2.0% |
| Diversified Machinery | 1.0% | 12.4% |
| Other Manufacturing | 0.6% | 7.6% |
| Construction & Homebuilding | 0.1% | 1.5% |
| Building Materials | 0.0% | 0.6% |
| Engineering and Construction | 0.1% | 0.9% |
| Paper & Packaging | 0.1% | 1.0% |
| Paper and Forest Products | 0.0% | 0.1% |
| Containers and Packaging | 0.1% | 0.9% |
| Aerospace & Defence | 0.0% | |
| Aerospace and Defense | 0.0% | |
| Transportation | 0.0% | |
| Transportation | 0.0% | |
| Automotive | 0.0% | 0.2% |
| Auto Parts and Equipment | 0.0% | 0.2% |
| Total | 8.0% | 100.0% |
Source: Bloomberg, Janus Henderson, as at 10 March 2025. European CLO universe: outstanding European CLO universe according to JHI.
Given the relatively low national representation of certain sectors, Germany’s expansionary ambitions may necessitate close collaboration with Eurozone members and other partners like the UK to meet its economic and spending goals.
In the CLO universe, there is a 34% exposure to affected industries (as outlined above) across the Eurozone (excluding Germany), and an additional 9.5% exposure to corporates domiciled in the UK within these industries. Figure 2 below details the industry breakdown across these jurisdictions.
With over 195 companies in the Eurozone and a further 44 in the United Kingdom represented in the CLO universe – spanning sectors such as chemicals, technology, telecommunications, and manufacturing –these companies could benefit from the positive effects of German fiscal expansion. Moreover, the potential for similar economic programmes by other European governments could amplify these benefits at a national level.
Figure 2: Exposure of specific sectors in the CLO universe to corporations domiciled in the Eurozone (excluding Germany) and the UK
| Sector and sub-sector | Eurozone ex Germany | United Kingdom | ||
| % of CLO Universe | % of sub-group | % of CLO universe | % of sub-group | |
| Healthcare | 8.9% | 26.0% | 1.8% | 19.2% |
| Biotechnology | 0.7% | 2.1% | 0.0% | |
| Healthcare Products | 0.4% | 1.3% | 0.0% | 0.2% |
| Healthcare Services | 5.2% | 15.2% | 0.5% | 5.8% |
| Pharmaceuticals | 2.5% | 7.3% | 1.2% | 13.2% |
| Services | 5.5% | 16.0% | 2.8% | 30.2% |
| Commercial Services | 5.3% | 15.4% | 2.8% | 30.2% |
| Storage and Warehousing | 0.2% | 0.6% | 0.0% | |
| Media & Telecom | 6.0% | 17.7% | 2.3% | 24.4% |
| Media | 1.9% | 5.6% | 0.7% | 7.7% |
| Telecommunications | 4.1% | 12.1% | 1.6% | 16.7% |
| Technology | 3.6% | 10.7% | 0.3% | 3.2% |
| Computers | 1.4% | 4.1% | 0.0% | |
| Electronics | 0.6% | 1.6% | 0.0% | |
| Semiconductors | 0.0% | 0.0% | 0.2% | 2.4% |
| Software | 1.7% | 4.9% | 0.1% | 0.7% |
| Chemicals | 3.5% | 10.2% | 1.0% | 10.5% |
| Chemicals | 3.5% | 10.2% | 1.0% | 10.5% |
| Other Chemical Manufacturing | 0.0% | 0.0% | ||
| Manufacturing | 1.7% | 4.9% | 0.4% | 4.0% |
| Electrical Equipment | 0.1% | 0.2% | 0.0% | |
| Hand and Machine Tools | 0.1% | 0.2% | 0.0% | |
| Diversified Machinery | 1.0% | 3.1% | 0.4% | 4.0% |
| Other Manufacturing | 0.5% | 1.5% | 0.0% | |
| Construction & Homebuilding | 2.9% | 8.5% | 0.5% | 5.4% |
| Building Materials | 1.7% | 5.0% | 0.3% | 3.7% |
| Engineering and Construction | 1.2% | 3.4% | 0.2% | 1.7% |
| Paper & Packaging | 1.4% | 4.0% | 0.0% | |
| Paper and Forest Products | 0.3% | 1.0% | 0.0% | |
| Containers and Packaging | 1.0% | 3.1% | 0.0% | |
| Aerospace & Defence | 0.5% | 1.6% | 0.0% | 0.0% |
| Aerospace and Defense | 0.5% | 1.6% | 0.0% | 0.0% |
| Transportation | 0.1% | 0.4% | 0.2% | 1.9% |
| Transportation | 0.1% | 0.4% | 0.2% | 1.9% |
| Automotive | 0.0% | 0.1% | 0.1% | 1.2% |
| Auto Parts and Equipment | 0.0% | 0.1% | 0.1% | 1.2% |
| Total | 34.0% | 100.0% | 9.4% | 100.0% |
Source: Bloomberg, Janus Henderson, as at 10 March 2025. European CLO universe: outstanding European CLO universe according to JHI.
Every action has a reaction
There is a valid concern that increased spending might lead to higher inflation, as companies may raise prices faster than expanding their productive capacity. This is evidenced by the recent surge in defence companies’ share prices, with market analysts predicting higher earnings. In such circumstances, the role of CLO managers becomes crucial, as they are responsible for ensuring the application of expert credit analysis and risk assessment.
For CLO bond investors, the ability to distinguish between managers who effectively identify risks and opportunities and those who do not, will be reflected in the performance and volatility of their CLO bond portfolios.
Another important consideration is the potential impact on interest rates. While financial markets and corporates broadly welcome a more assertive Germany and the additional fiscal spending, the downside, however, is a potentially less predictable path for rates. The announcement of the German fiscal package led to the 10-year Bund yield’s largest one-day increase in 30 years, rising 30 basis points to 2.79% on 5 March 2025[2].
While investment grade corporate bonds saw yield increases – partially offset by a decline in credit spreads – the rise in rates for German government bonds was largely unnoticed in the CLO bond market. This scenario underscores the benefits of floating-rate CLO bond allocations to fixed income portfolios for investors, highlighting their resilience and potential for stability in a fluctuating market.
Footnotes
[1] Source: Bloomberg, Janus Henderson, as at 10 March 2025. European CLO universe: outstanding European CLO universe according to JHI.
[2] Source: Bloomberg, Germany Generic 10-year Government Bond (Bund), ICE BofA Euro Corporate Index, yield to worst, 5 December 2024 to 5 March 2025. Yields may vary over time and are not guaranteed.
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Important information
Please read the following important information regarding funds related to this article.
- Gli emittenti di obbligazioni (o di strumenti del mercato monetario) potrebbero non essere più in grado di pagare gli interessi o rimborsare il capitale, ovvero potrebbero non intendere più farlo. In tal caso, o qualora il mercato ritenga che ciò sia possibile, il valore dell'obbligazione scenderebbe.
- L’aumento (o la diminuzione) dei tassi d’interesse può influire in modo diverso su titoli diversi. Nello specifico, i valori delle obbligazioni si riducono di norma con l'aumentare dei tassi d'interesse. Questo rischio risulta di norma più significativo quando la scadenza di un investimento obbligazionario è a più lungo termine.
- Il Fondo investe in obbligazioni ad alto rendimento (non investment grade) che, sebbene offrano di norma un interesse superiore a quelle investment grade, sono più speculative e più sensibili a variazioni sfavorevoli delle condizioni di mercato.
- Alcune obbligazioni (obbligazioni callable) consentono ai loro emittenti il diritto di rimborsare anticipatamente il capitale o di estendere la scadenza. Gli emittenti possono esercitare tali diritti laddove li ritengano vantaggiosi e, di conseguenza, il valore del Fondo può esserne influenzato.
- Un Fondo che presenta un’esposizione elevata a un determinato paese o regione geografica comporta un livello maggiore di rischio rispetto a un Fondo più diversificato.
- Il Fondo potrebbe usare derivati al fine di conseguire il suo obiettivo d'investimento. Ciò potrebbe determinare una "leva", che potrebbe amplificare i risultati dell'investimento, e le perdite o i guadagni per il Fondo potrebbero superare il costo del derivato. I derivati comportano rischi aggiuntivi, in particolare il rischio che la controparte del derivato non adempia ai suoi obblighi contrattuali.
- Se il Fondo, o una sua classe di azioni con copertura, intende attenuare le fluttuazioni del tasso di cambio tra una valuta e la valuta di base, la stessa strategia di copertura potrebbe generare un effetto positivo o negativo sul valore del Fondo, a causa delle differenze di tasso d’interesse a breve termine tra le due valute.
- I titoli del Fondo potrebbero diventare difficili da valutare o da vendere al prezzo e con le tempistiche desiderati, specie in condizioni di mercato estreme con il prezzo delle attività in calo, aumentando il rischio di perdite sull'investimento.
- Il Fondo può sostenere un livello di costi di operazione più elevato per effetto dell’investimento su mercati caratterizzati da una minore attività di contrattazione o meno sviluppati rispetto a un fondo che investa su mercati più attivi/sviluppati.
- Le spese correnti possono essere prelevate, in tutto o in parte, dal capitale, il che potrebbe erodere il capitale o ridurne il potenziale di crescita.
- Il Fondo potrebbe perdere denaro se una controparte con la quale il Fondo effettua scambi non fosse più intenzionata ad adempiere ai propri obblighi, o a causa di un errore o di un ritardo nei processi operativi o di una negligenza di un fornitore terzo.
- Oltre al reddito, questa classe di azioni può distribuire plusvalenze di capitale realizzate e non realizzate e il capitale inizialmente investito. Sono dedotti dal capitale anche commissioni, oneri e spese. Entrambi i fattori possono comportare l’erosione del capitale e un potenziale ridotto di crescita del medesimo. Si richiama l’attenzione degli investitori anche sul fatto che le distribuzioni di tale natura possono essere trattate (e quindi imponibili) come reddito, secondo la legislazione fiscale locale.
Specific risks
5 minute read
Key takeaways:
- The CLO market currently has circa 8% exposure to a diverse range of German corporates, particularly in manufacturing, technology, and healthcare, showing stable fundamentals with potential to benefit from fiscal expansion.
- With over 30% exposure in the Eurozone and nearly 10% in the UK, companies within the European CLO universe are likely to experience positive impacts from Germany’s fiscal expansion and potentially similar economic measures across Europe.
- Amid fiscal spending concerns possibly spiking inflation, CLO managers’ critical role in credit risk analysis and opportunity identification is vital for portfolio performance. The interest rate rise post-Germany’s announcement underscores floating-rate CLO bonds’ resilience and benefits for fixed income portfolios.
