Bain Capital CLO tranche defaults in post-2008 first for Europe

Part of a European collateralized loan obligation managed by Bain Capital has failed to repay investors in full, the first such default since an overhaul of the asset-backed securities more than a decade ago.

Rating agency Fitch said it downgraded the most junior tranche of the private investment firm’s Euro CLO 2018-1 DAC bond to default on Thursday, after the note returned €7.4 million ($8.5 million) to its holders compared with a par value of €11.2 million. The total value of the vehicle was €361 million.

A Bain Capital spokesperson declined to comment.


CLOs bundle leveraged loans into bonds with different levels of risk and reward, allowing managers to tailor portfolios to investors. In the wake of the global financial crisis, regulators imposed stricter quality tests and standards on the investment vehicles, leading to the emergence of the so-called CLO 2.0 in the early part of the last decade. This default is the first of the new generation.

Until recently, there had been little sign of strain but pressure on a few weaker deals has been building this year as the quality of some underlying assets deteriorated, in part because of an AI-induced selloff in the software industry that roiled the leveraged loan market.

The ratings on three more single-B rated notes, Barings Euro CLO 2029-2, Man GLG Euro CLO V and Toro European CLO 6, were downgraded to triple-C by Fitch last month, the agency said in a report.

Managers of older CLOs face a particular challenge. They can no longer trade weaker loans for higher quality credits once they’ve exited so-called reinvesment periods, and refinancing is unlikely to be possible because the cost of capital is now much higher. That leaves only one option, liquidating and repaying as much as possible of the outstanding bonds.

The Bain Capital CLO was designed to cascade cash flow generated by the pool of mostly senior-secured corporate loans down through the tranches of the vehicle. Investors in the other classes were paid in full, Fitch said.