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Credit Estimates Within Middle Market CLOs Fourth-Quarter 2018

Feb. 27 2019 — (Editor's note: This piece is part of a continuing series highlighting the credit performance and other metrics of middle market loans for which S&P Global Ratings provided credit estimates. The focus of this report is on all middle market companies for which we provided estimates during a specific quarter and whose loans collateralize middle market collateralized loan obligations (CLOs) we have rated or are in the process of rating.)

This report looks at the credit metrics of companies for which S&P Global Ratings completed credit estimates in the fourth quarter of 2018. The report also compares these metrics with those of U.S. companies whose credit estimates we completed in in the fourth quarter of 2017.

Consistent with the fourth quarter of 2017, Business & Consumer Services, Technology, and Health care continue to dominate the sectors for which we provide credit estimates. We completed 329 credit estimates in the fourth quarter of 2018, 79 of which were also done in the fourth quarter of 2017.

The number of entities with a 'ccc' credit estimate score has increased, accounting for 13% of deals in the fourth quarter of 2018 versus 7% of deals in the fourth quarter of 2017. We attribute the increase to an increase in high leverage ratios (debt to EBITDA greater than 10x) as well as oncoming debt maturities, which we believe the companies may have difficulty refinancing. When reviewing the same highly leveraged companies completed in the fourth quarters of 2018 and 2017, EBITDA decreased by 1.2% on average (after excluding one outlier with negative EBITDA). EBITDA decreased by 43% for the same highly leveraged companies in the 'ccc' range. 

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