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Covid-19 and European ABS: Resilience under stress testing


In light of the extreme price moves in European ABS, we ran a number of Covid-19-specific stress-tests on securities. This paper details the outcomes.

  • Intensively stress testing ABS to assess their potential resilience to a range of extreme negative scenarios has been integral to our investment approach for decades.
  • In light of the extreme price moves in European ABS, our analysts have applied Covid-19 specific stresses to a number of UK RMBS and European CLOs, to identify the combination of factors that would have to occur for us to lose the first pound of principal investment.
  • The outcomes illustrate the robustness of these assets to repay at par even under worst-case scenarios that assume default, prepayment and recovery rates on a scale never previously experienced in either the UK or Europe.
  • Given that certain CLOs are trading at around 80% to 85% of par at present, the spreads offered appear very attractive in our view given this credit resiliency.

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.

Read the full paper

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