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CLO Leveraged Finance North America

How COVID-19 Affected U.S. Middle-Market And BSL CLO Performance In 2020

The advent of the COVID-19 pandemic and the resulting shutdowns in early 2020 presented significant performance challenges to many of the companies whose loans were held in U.S. collateralized loan obligation (CLO) transactions. With some companies in consumer-facing sectors facing the prospect of a second quarter with severely impacted business and earnings, negative actions on corporate ratings came swiftly amongst rated broadly syndicated loan (BSL) issuers. .

This change in portfolio credit and CLO metrics resulted in a modest number of downgrades on U.S. CLO ratings. However, in spite of the fact that companies held in MM and BSL CLOs both experienced stresses due to the pandemic, the outcomes of how the two CLO types fared in 2020 ended up being somewhat different. To examine those differences in performances, we took samples of each type of CLO and studied their 2020 performance for some interesting findings, which we discuss below.

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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

Default, Transition, and Recovery: The European Speculative-Grade Corporate Default Rate Could Reach 6.5% By December 2021

S&P Global Ratings Research expects the European trailing-12-month speculative-grade corporate default rate to increase to 6.5% by December 2021 from 5.3% as of December 2020 (see chart 1). S&P Global economists expect the eurozone economy to rebound in 2021 to 4.8% GDP growth after contracting 7.2% in 2020. The latest wave of lockdowns, brought on by rising COVID-19 infections and emergence of new COVID-19 variants, could last until midyear and continue to challenge recovery. Importantly, the European Central Bank (ECB), Bank of England, and most national governments have been providing historically large support. Our economists' believe that aggressive fiscal policies' impact would be greater under current conditions of lower demand and negative interest rates. At the time of this writing, we anticipate significant fiscal support measures will remain in place in 2021, and that phasing out of increases in public spending will begin next year.

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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 Q4 2020 Update: Leverage Jumps A Full Turn For The Worse In The Second Quarter Before Managing A Partial Turnaround In The Third Quarter

After navigating arguably the swiftest economic contraction in modern history, both the high-yield and leveraged loan markets were reinvigorated in the second half of 2020 following a brief pause due to the U.S. Federal Reserve's intervention and the renewed risk appetite of yield-seeking investors. This has led pricing and liquidity to return to (and exceed) pre-pandemic levels in the less than nine months since the sell-off in February and March, when yields signaled extreme distress.

The new year has brought both challenges and opportunities. For example, a few sectors that rapidly fell out of favor last year are turning the corner supported by hopes for rapid global inoculation against the coronavirus. For others, the pandemic has accelerated long-standing transitions (i.e. from movie theaters to at-home streaming), while certain sectors expect the effects of the pandemic (such as the shifts in their demand) on their operations to outlive the crisis. In addition to these new emerging trends, data from the first nine months of the pandemic highlights its effect on the leverage of speculative-grade corporate borrowers. The sheer size of the debt loads at these borrowers will likely pose a challenge for their credit quality even if they expand their business..

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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

Credit Trends: The U.S. Distress Ratio Is Down Nearly 90% Since March

Continued support from U.S. monetary and fiscal policy has stabilized borrowing conditions, pushing down the overall distress ratio. U.S. composite spreads have compressed across all rating categories, but are steeper among issuers rated 'BB' and below. Over the past 11 months, the average option-adjusted spread among issues rated 'CCC+' and below has tightened significantly. Issuance activity in the U.S. has remained high through February, even for lower-rated issuers.

We expect the U.S. distress ratio to remain relatively stable in the near term, although risks remain, including the possibility of further waves in the COVID-19 virus, which may lead to additional economic lockdowns. Additionally, Treasury yields have been steadily rising, which so far has had little effect on credit markets but may put additional liquidity pressure on speculative-grade issuers.

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