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CLO Leveraged Finance North America

Credit Estimates For Entities Backing U.S. Middle-Market CLOs Took A Hit From COVID-19

Before the onset of the COVID-19 pandemic, favorable credit conditions, along with prolonged periods of low interest rates in the U.S., steered investors towards a range of alternative asset classes in pursuit of higher yields and returns. One asset class that attracted greater investor interest during this time were collateralized loan obligations backed by middle-market loans (MM CLOs), as reflected by the continued increase in credit estimates issued for middle-market entities since 2017 (see chart 1).

Unsurprisingly, there was a decline in the number of newly issued credit estimates during the second quarter of this year as the leveraged loan and CLO market took a pause due to COVID-19 before issuance picked up again. As of today, there is a robust pipeline of new credit estimates in the works as a number of MM CLOs aim to price and/or close by year end..

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The U.S. Leveraged Finance and Recovery team is producing a monthly podcast series entitled “The Upgrade.” This series focuses on leveraged finance issuers that have upward rating potential, providing listeners with concise insights from the primary analyst along with relevant CLO market implications. In the time of Covid-19, other timely topics are also being discussed.

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CLO Leveraged Finance EMEA

COVID-19 Tests The Resilience Of European CLOs In 2020

2020 has been an extraordinary year for collateralized loan obligations (CLOs), and certainly one to remember. The leveraged loan market, which fuels the CLO market, was hit hard by the pandemic. Defaults and 'CCC' holdings in CLO portfolios are up, loan supply is down, and while CLO managers have been navigating the new environment by trading out of weaker corporate sectors, this strategy has in some instances come at the price of par losses. All combined, these factors have negatively affected European CLO ratings, largely in the form of CreditWatch negative placements and downgrades of junior tranches. In this publication, we dig deeper into our rating actions on European CLOs this year, focusing on the impact of corporate rating actions on the underlying portfolios, as well as how CLO transactions' structural mitigants have limited the rating pressure on speculative-grade tranches.

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Everything you ever wanted to know about CLOs, Corporate Credits, Leveraged Finance and what they are. With the aim of providing market participants with further advanced analytical insight into Corporate Credits, CLOs and Leveraged Finance deals, S&P Global Ratings is holding regular podcast episodes every fortnight, based on key features we’re seeing in corporate credits and sectors that CLOs are exposed to.

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Quarterly Reports North America

U.S. Leveraged Finance Q3 2020 Update: Pandemic-Induced Borrowing Dilutes Recovery Prospects And Lessens Interest Coverage

As short-term borrowings at the onset of the pandemic are starting to look permanent, in this quarterly installment, we take the pulse of issuers' abilities to meet their interest obligations, which we consider of the utmost importance in our assessment of issuer creditworthiness and pivotal when assessing the health of today's credit markets. Trend analysis for the first half of 2020 reveals EBITDA-to-interest coverage ratios are in steady decline despite near-zero interest rates. Other than sharp drops in EBITDA, such strain can also be attributed to the aggressive borrowing before the pandemic and has since been exacerbated.

We also follow up on the pandemic's effect on recovery outlooks, delving into the dominating factor that drove recovery movements. About two-thirds of the downward revision were caused by changes to the capital structure, including debt add-ons (given the strength of investor appetite for more leverage notwithstanding the recession) or reshuffling of priorities--followed by steep and permanent enterprise value erosions. As is typical, the most extreme movements were the result of distressed restructures, whereby minority creditors experienced the highest swing after falling victim to priming liens.

Lastly, as the volume of leveraged loans experienced a resurgence, we saw recovery estimates of first-lien new issues stabilize. The average third-quarter recovery was in line with pre-pandemic levels and down sharply from its short-lived peak in the second quarter.


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Quarterly Reports EMEA

CLO Pulse Q2 2020: Sector Averages Of Reinvesting European CLO Assets

European collateral loan obligations (CLOs) typically benefit from portfolio diversification, both from an issuer and sector perspective, with CLO managers maintaining portfolios of leveraged loans that have an average exposure to 137 different corporate issuers operating across 38 different industry categories.

In this publication, we examine the aggregate asset quality held by European CLOs, observed through key credit metrics and consolidated by S&P Global Ratings' CLO industry sectors. Specifically, this edition of sector average metrics for European CLO assets focuses on loans issued by 477 corporate issuers, which represents over 95% of the assets under management (AUM) held in reinvesting European CLOs rated by S&P Global Ratings as reported at June 30. We calculated the average metrics for all floating-rate assets with both an S&P Global Ratings' credit rating and an S&P Global Ratings' recovery rating (the S&P Global Ratings-rated CLO assets), weighted by the euro notional exposure to each asset.


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Global Default Trends

Oil And Gas Leads 2020 Global Corporate Defaults, Reflecting Sector Challenges

The oil and gas sector continues to lead the global default tally with 45, with the addition of two defaults this week, but remains below its full-year 2016 record of 61. Regionally, European oil and gas defaults have far surpassed their 2016 levels with 10, with the highest numbers coming from the U.K. and Switzerland. In the U.S., defaults have led the sector tally with 31 but remain below the 2016 record of 48 defaults (see chart 1).

As U.S. oil and gas companies have $19 billion of debt set to mature through 2021, we expect oil and gas companies' operating cash flow to remain below average and anticipate that the conditions in the capital markets will stay challenging for most entities in the sector.

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