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COMMENTS

Twenty-Five Years Strong: Update On CLO 1.0 Defaults


Twenty-Five Years Strong: Update On CLO 1.0 Defaults

S&P Global Ratings rated about $500 billion worth of U.S. collateralized loan obligation (CLO) transactions issued from 1994 through the end of 2009 by about 200 managers. This is known as the "CLO 1.0" generation of transactions, and it comprises 4,322 ratings on classes of notes across around 800 cash flow CLO structures. Of those, just 40 classes defaulted, 15 of which began with an investment-grade rating (of 'BBB-' or higher) (see table 1). By the end of the first half of 2019, we have rated over 7,000 classes from nearly 900 U.S. "CLO 2.0" transactions (transactions issued after the credit crisis), of which none have defaulted to date.

Table 1

U.S. CLO 1.0 Default Summary By Original Rating
Original ratings Defaults
'AAA' 1540 0
'AA' 616 1
'A' 790 5
'BBB' 783 9
'BB' 565 22
'B' 28 3
Total 4322 40
CLO--Collateralized loan obligation. Source: S&P Global Ratings Research.

In early 2019, the ratings on the class E-1 and E-2 notes from Global Leveraged Capital Credit Opportunity Fund I (GLC), a CLO 1.0 that closed in 2006, were lowered to 'D (sf)' because they did not receive their principal in full upon the transaction's maturity date. We had previously lowered our ratings on both of these classes to 'CC (sf)' toward the end of 2018 due to concerns over the transaction's ability to repay the notes given the illiquid nature of the remaining portfolio assets amidst a time of dislocation in the market prices of leveraged loans. We classified the default reasoning of these tranches as collateral deterioration in the table above.

Table 2

CLO 1.0 Defaults
2002 2009 2010 2011 2012 2013 2014 2017 2019 Total
Collateral deterioration 2 5 5 8 1 2 23
Investor action 1 1 2
Market value provisions 1 5 6
Missed interest/non-deferrable 3 3 1 2 9
Total 2 3 4 11 2 5 10 1 2 40

As of third-quarter 2019, there are still 22 tranches across seven U.S. CLO 1.0 transactions still outstanding, with a total of about half a billion dollars of assets under management. These transactions are in various stages of amortization, and we expect some will pay down completely before the end of the year. The earliest maturity date of these remaining CLO 1.0 notes is toward the end of 2021.

CLO 2.0 Ratings Surpassed CLO 1.0 Ratings In 2017

With strong demand for CLO notes in recent years, the number of newly rated U.S. CLO 2.0 notes surpassed CLO 1.0 totals back in 2017 as the sector regained momentum after the energy and retail slowdown. U.S. CLO issuance counts grew to a new peak in 2018, buoyed by the volume of new issuances, resets, and refinances. After a record-setting 2018, the number of new issue CLO ratings has tapered off somewhat during the first half of 2019.

Chart 1

image

After Nearly A Decade, A U.S. CLO 2.0 Note Has Yet To Default

The damage from the energy and retail slowdown in 2015-2016 continues to negatively impact some early vintage CLO 2.0 transactions (pre 2015) today. Many CLO 2.0s rebounded as the market started to improve in 2017 and 2018 with some deals getting a new lease on life through a reset that included an extension of the reinvestment period. Meanwhile, other CLO 2.0s began their amortization periods with a weaker portfolio after the energy slowdown, a challenge for some CLO managers with larger 'CCC' exposures that mostly grew as a percentage as the portfolio shrunk, leading to potential overcollateralization (O/C) haircut implications. As of third-quarter 2019, there are seven CLO 2.0 transactions with junior tranches that have been downgraded to the 'CCC' category through multiple downgrades (see table 4). These CLO note ratings were lowered into the 'CCC' rating category because, in our view, the notes are vulnerable to nonpayment and dependent upon favorable business, financial, and economic conditions to meet their financial commitments due to par loss (i.e. low O/C ratios) and exposure to distressed assets ('CCC' rated and non-performing buckets).

Although there are a handful of CLO 2.0s notes that may be at risk of default in the future, no U.S. CLO 2.0s rated by S&P Global Ratings have defaulted to date. Since 2010, S&P Global Ratings has assigned ratings on over 7,000 U.S. CLO 2.0 tranches. More than 3,700 of these CLO 2.0 tranches have subsequently had their ratings withdrawn, most of which after having paid off in full. CLO 2.0 transactions currently have record levels of exposure to 'B-' rated issuers leading to concern that in a downturn some of these 'B-' companies may see ratings lowered to the 'CCC' category and potentially result in rating actions on the underlying CLO ratings. As noted above, time will tell if the seven U.S. CLO 2.0 tranches currently rated within the 'CCC' rating category will pay off in full before their maturity date (see table 4).

Table 3

S&P Global Ratings Rated U.S. CLO Tranches With Ratings Lowered To 'D' (1994-2019)
Transaction name Tranche name Year originated Original rating Year rating lowered to 'D' Cause
Confidentially rated tranche (CLO 1) N/A 1999 BB- 2013 Collateral deterioration.
Confidentially rated tranche (CLO 1) N/A 1999 BB- 2013 Collateral deterioration.
Confidentially rated tranche (CLO 1) N/A 1999 BB- 2013 Collateral deterioration.
Confidentially rated tranche (CLO 2) N/A 1999 B+ 2011 Collateral deterioration.
Confidentially rated tranche (CLO 2) N/A 1999 B+ 2011 Collateral deterioration.
KBC - Orion Commercial Loan Master Trust D-1 1999 BB 2002 Collateral deterioration.
KBC - Orion Commercial Loan Master Trust D-2 1999 BB 2002 Collateral deterioration.
Confidentially rated tranche (CLO 3) N/A 2000 B 2011 Collateral deterioration.
Confidentially rated tranche (CLO 4) N/A 2001 BB 2012 Missed interest/non-deferrable.
Highland Loan Funding V Ltd. C-1 2001 BBB 2014 Collateral deterioration.
Highland Loan Funding V Ltd. C-2 2001 BBB 2014 Collateral deterioration.
Highland Loan Funding V Ltd. D 2001 BB+ 2014 Collateral deterioration.
Landmark II CDO Ltd.(i) B 2002 AA 2010 Missed interest/non-deferrable.
Landmark II CDO Ltd. C 2002 BBB 2011 Collateral deterioration.
Landmark II CDO Ltd. D 2002 BB 2011 Collateral deterioration.
Stanfield Carrera CLO Ltd. C-1 2002 BBB 2014 Missed interest/non-deferrable.
Stanfield Carrera CLO Ltd. C-2 2002 BBB 2014 Missed interest/non-deferrable.
Stanfield Carrera CLO Ltd. D-1 2002 BB 2014 Collateral deterioration.
Stanfield Carrera CLO Ltd. D-2 2002 BB 2014 Collateral deterioration.
Foxe Basin CLO 2003 Ltd. D 2003 BB 2014 Collateral deterioration.
Katonah V Ltd. D 2003 BB 2013 Collateral deterioration.
Longhorn CDO III Ltd. E 2003 BB 2013 Collateral deterioration.
Premium Loan Trust I Ltd. C 2004 BBB 2014 Collateral deterioration.
Premium Loan Trust I Ltd. D 2004 BB 2014 Collateral deterioration.
Airlie CLO 2006-II Ltd. D 2006 BB 2017 Collateral deterioration.
GE Commercial Loan Trust Series 2006-1 PTC 2006 BB 2010 Market value provisions.
GE Commercial Loan Trust Series 2006-2 D 2006 BBB- 2011 Market value provisions.
GE Commercial Loan Trust Series 2006-2 PT 2006 BB 2011 Market value provisions.
GE Commercial Loan Trust Series 2006-3 C 2006 A 2011 Market value provisions.
GE Commercial Loan Trust Series 2006-3 D 2006 BBB- 2011 Market value provisions.
GE Commercial Loan Trust Series 2006-3 PTC 2006 BB 2011 Market value provisions.
Global Leveraged Capital Credit Opportunity Fund I E-1 2006 BB 2019 Collateral deterioration.
Global Leveraged Capital Credit Opportunity Fund I E-2 2006 BB 2019 Collateral deterioration.
Sandelman Finance 2006-1 Ltd. E 2006 BB 2011 Investor action.
Rosedale CLO II Ltd. E 2007 BB 2012 Investor action.
Kingfisher Capital CLO Ltd. A 2008 BBB+ 2009 Missed interest/non-deferrable.
Pine CCS Ltd. A-1 2008 A- 2009 Missed interest/non-deferrable.
Pine CCS Ltd. A-2 2008 A- 2009 Missed interest/non-deferrable.
Spruce CCS Ltd. Senior notes 2008 A 2010 Missed interest/non-deferrable.
Verano CCS Ltd. Senior notes 2008 A- 2010 Missed interest/non-deferrable.
(i)The Class B note of Landmark II CDO Ltd., a non-deferrable note originally rated 'AA', had its rating lowered to 'D' in 2010 after the trustee escrowed the note's interest payments after filing an interpleader action with the U.S. courts. The class B note did not suffer economic loss as its rating was raised from 'D' to 'BB+ (sf)' in 2011 after receiving all interest owed, as well as interest on interest. The class B paid off its full principal balance in full shortly after. CLO--Collateralized loan obligation. N/A--Not applicable. PTC--Preferred trust certificates. PT--Preferred trust. Source: S&P Global Ratings Research.

Table 4

CLO 2.0s Currently Rated In The 'CCC' Category
Transaction name Tranche name Year originated Original rating Current rating Date of most recent rating action
Halcyon Loan Advisors Funding 2012-1 Ltd. D 2012 BB (sf) CCC (sf) Aug. 2, 2019
CVP Cascade CLO-1 Ltd. E 2014 B (sf) CCC (sf) Aug. 5, 2020
BNPP IP CLO 2014-1 Ltd. E 2014 B (sf) CCC (sf) July 23, 2019
Avery Point IV CLO Ltd. F 2014 B- (sf) CCC+ (sf) July 30, 2019
Trinitas CLO II Ltd. F 2014 B (sf) CCC+ (sf) March 13, 2019
CVP Cascade CLO-2 Ltd. E 2014 B (sf) CCC+ (sf) July 25, 2019
Hull Street CLO Ltd. F 2014 B (sf) CCC+ (sf) Aug. 2, 2019

This report does not constitute a rating action.

Primary Credit Analysts:Daniel Hu, FRM, New York (1) 212-438-2206;
daniel.hu@spglobal.com
Evan M Gunter, New York (1) 212-438-6412;
evan.gunter@spglobal.com
Structured Finance Sector Lead:Stephen A Anderberg, New York (1) 212-438-8991;
stephen.anderberg@spglobal.com
Head of Ratings Performance Analytics:Nick W Kraemer, FRM, New York (1) 212-438-1698;
nick.kraemer@spglobal.com

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