Broadly syndicated loan collateral loan obligations (BSL CLOs) benefit from portfolio diversification, both from an issuer and industry sector standpoint, with most CLO managers maintaining highly diversified portfolios of leveraged loans with exposure to many different corporate issuers. Based on our review of second-quarter 2019 data, the average reinvesting U.S. BSL CLO portfolio rated by S&P Global Ratings had an average obligor diversity metric, or effective obligor count, of 196 and an average industry diversity metric, or effective industry count, of 24 (see "Second-Quarter 2019 Non-Model CDO Monitor Benchmarks Reveal Relative Credit Quality And Diversity Of CLO Portfolios," published Aug. 2, 2019).
The Rebound In Loan Prices And Issuance Lost Steam In The Second Quarter
Leveraged loan issuance slid to $107.6 billion in the second quarter, wrapping up a slow first half of the year for loan issuance despite healthy demand from CLO investors, based on information from S&P Global Ratings' Leveraged Commentary & Data (LCD). Following the record issuance seen in 2017 and 2018, loan issuance has been tepid so far this year. The growing preference for fixed-rate investments (given the signals from the Fed) underpinned the slowing pace of leveraged loan growth in the second quarter, and the uncertainty around the economy arising from slowdown in global growth coupled with trade tensions is a dampener as well. Amid the uncertain market conditions, transactions backed by mergers and acquisitions (M&As) and leveraged buyouts (LBOs) trickled in at a much slower pace. In contrast, at the same time last year, the favorable macroeconomic outlook and tax cuts bolstered market confidence and fueled M&A appetite in the months that followed.
|Floating-Rate CLO Assets With Derived S&P Global Ratings' Credit Rating And Recovery Rating(i)|
|Quarter||SPWARF||WARR (%)||WAS (%)||WAP||Debt to EBITDA||Interest coverage||Issuer count (no.)|
|(i)See Appendix for detailed explanations of these metrics. SPWARF--S&P Global Ratings' weighted average rating factor. WARR--Weighted average recovery rating. WAS--Weighted average spread.|
Prices of loans held in U.S. BSL CLOs were nearly flat during the second quarter, with only a 15 basis point increase after increasing to 97 from 95 during the first quarter. Loan prices have yet to recoup all of their losses from fourth-quarter 2018 and are still notably lower than the level (average of 99) as of the end of third-quarter 2018. S&P Global Ratings' weighted average rating factor (SPWARF) and weighted average recovery rate (WARR) remain steady, though deteriorating slightly over the previous four quarters; average leverage metrics also declined slightly (see the Appendix). Together, these dips indicate a modest deterioration in the overall credit rating and recovery rating distribution. On the other hand, the weighted average spread of the loans experienced a slight uptick.
The Top Five GICS Sectors Account For About One-Third Of The Assets Under Management In U.S. BSL CLOs
Software; health care providers and services (P&S); media; hotel, restaurants, and leisure; and IT services issuers make up the top five largest Global Industry Classification Standard (GICS) sector exposures in reinvesting U.S. BSL CLOs. These five GICS sectors currently account for 33% of the assets under management (AUM), and they each have a unique credit and return profile (see chart 1). In second-quarter 2019, health care P&S became the second-largest GIC exposure for CLOs for the first time since we began these updates.
Loans from issuers classified as software, health care P&S, and IT services, on average, have:
- Below average credit ratings (SPWARF),
- Below average recovery ratings (WARR),
- Below average corporate metrics (debt to EBITDA and interest coverage), and
- Above average return (WAS).
Loans from issuers classified as media and hotels/restaurants/leisure, on average, have:
- Above average credit ratings (SPWARF),
- Above average recovery ratings (WARR),
- Above average corporate metrics (debt to EBITDA and interest coverage), and
- Below average return (WAS).
The largest CLO sector: Software exposure
Loans from software issuers continue to offer high relative spread for CLO portfolios. However, the higher return is paired with a drag on the overall credit and recovery ratings distribution (the average SPWARF and WARR for software exposures have consistently been worse than the overall average). As a result of the downgrades of companies with loans held in CLOs and new CLO exposures to lower-rated companies, there has been an increase in SPWARF of CLO assets (as noted in table 1). The credit deterioration of the software exposures has contributed to this decline in overall credit quality of CLO exposures, with the software sector's average SPWARF climbing up to 3,099 from 3,011 over the past year (see table 2). Thirteen percent of the software exposures have a negative rating bias (i.e., ratings with negative outlooks or on CreditWatch negative), which is below the overall average of 19% (see chart 2).
|Average Metrics Of Software Exposure(i)|
|Quarter||Issuer count (no.)||% CLO exposure||SPWARF||WARR (%)||WAS (%)|
|(i)See Appendix for detailed explanations of these metrics. SPWARF--S&P Global Ratings' weighted average rating factor. WARR--Weighted average recovery rating. WAS--Weighted average spread. CLO--Collateralized loan obligation.|
CLO Assets Weighted By Exposure
Weighted average metrics
We focus on the loans issued by over 1,400 corporate issuers, representing over 96% of AUM currently held in U.S. BSL CLOs rated by S&P Global Ratings. 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 floating S&P-rated CLO assets), weighted by the dollar exposure to each asset. These metrics include the SPWARF, WARR, weighted average spread, weighted average price, weighted average debt to EBIDTA, and weighted average interest coverage (see table 1 above). (See the Appendix for detailed explanations of the scope for this study and the metrics.)
The SPWARF of the S&P-rated CLO assets of 2,584 is higher than the SPWARF of the top 250 list, which was 2,403 as of second-quarter 2019 (see "The Most Widely Referenced Corporate Obligors In Rated U.S. BSL CLOs: Second-Quarter 2019," published July 8, 2019). The lower credit quality of the over 1,000 smaller and less-widely held issuers has caused the overall SPWARF to be higher. The top 250 list represent the most widely held issuers in CLOs, and they generally consist of the largest issuers, which happen to have higher ratings.
Average metrics per industry
We observed that the corporate issuers operating within various industries have different credit profiles. The loans they issue also have different characteristics. Using CLO exposures to these floating S&P-rated CLO assets, we calculated the average metrics described in the Appendix, weighted by par, across the various GICS sectors.
|Floating-Rate CLO Assets With Derived S&P Global Ratings' Credit And Recovery Ratings|
|GIC||Issuer count (no.)||% of exposure||SPWARF||WARR (%)||WAS (%)||WAP||Debt to EBITDA||Interest coverage|
|Health care providers and services||84||6.72||2,785||59.96||3.74||96.41||6.98||2.49|
|Hotels, restaurants, and leisure||89||6.40||2,515||71.64||3.08||98.40||5.95||3.18|
|Commercial services and supplies||63||3.61||2,930||62.90||3.60||96.76||6.92||2.77|
|Diversified telecommunication services||28||3.06||2,407||71.23||3.12||97.54||5.30||3.42|
|Trading companies and distributors||39||2.73||2,339||61.15||3.32||97.67||5.27||3.63|
|Containers and packaging||24||1.88||2,478||56.87||3.11||96.70||6.34||2.90|
|Oil, gas, and consumable fuels||42||1.81||2,771||69.82||4.22||94.08||4.58||4.34|
|Health care technology||16||1.71||2,811||62.40||3.75||98.44||11.67||1.97|
|Aerospace and defense||23||1.70||2,597||54.12||3.37||97.22||7.37||2.52|
|Electronic equipment, instruments, and components||20||1.50||1,968||64.01||3.11||98.31||4.92||3.52|
|Diversified consumer services||25||1.49||2,746||61.37||3.51||99.23||6.58||2.89|
|Health care equipment and supplies||26||1.32||2,885||57.16||4.16||97.38||6.70||2.57|
|Construction and engineering||24||1.27||2,563||51.75||3.75||97.99||5.52||3.23|
|Project finance: power||25||1.20||1,715||75.31||4.12||98.38||-||-|
|Real estate management and development||11||1.09||1,904||69.31||2.89||98.91||13.07||3.80|
|Life sciences tools and services||13||1.05||2,789||57.29||3.07||98.88||7.60||2.58|
|Food and staples retailing||8||1.00||2,128||77.41||3.41||94.70||6.04||3.02|
|Metals and mining||16||0.95||2,345||59.70||3.45||98.29||5.32||3.48|
|Technology hardware, storage, and peripherals||10||0.90||2,483||62.67||3.49||97.72||5.53||3.81|
|Wireless telecommunication services||4||0.86||2,308||80.22||2.51||98.40||4.45||5.67|
|Semiconductors and semiconductor equipment||18||0.82||1,808||64.22||2.62||92.36||4.73||9.22|
|Road and rail||13||0.81||2,873||64.87||4.33||98.71||7.61||2.71|
|Energy equipment and services||11||0.66||2,641||65.95||4.53||89.36||4.13||4.13|
|Interactive media and services||12||0.57||2,934||68.40||3.57||99.53||6.11||2.91|
|Independent power and renewable electricity producers||10||0.39||2,173||82.80||2.81||98.31||6.83||3.28|
|Air freight and logistics||8||0.34||2,749||70.44||3.54||93.77||4.75||3.75|
|Internet and direct marketing retail||7||0.29||3,087||48.93||3.29||96.70||6.10||3.48|
|Textiles, apparel and luxury goods||16||0.24||2,721||56.93||4.88||94.66||5.61||3.30|
|Equity real estate investment trusts (reits)||4||0.21||3,461||88.69||3.55||97.70||5.48||3.23|
|Project finance: oil and gas||4||0.15||1,681||81.03||3.37||98.47|
|Paper and forest products||5||0.06||3,150||59.46||4.78||98.46||4.87||3.11|
|Thrifts and mortgage finance||2||0.05||2,670||78.14||4.55||99.36||9.89||1.09|
|(i)See Appendix for detailed explanations of these metrics. GIC--Global Industry Classification Standard. CLO--Collateralized loan obligation. SPWARF--S&P Global Ratings' weighted average rating factor. WARR--Weighted average recovery rating. WAS--Weighted average spread. Weighted average price.|
Ratings bias per GICS sector
At the end of the second quarter, 19.0% of the floating S&P-rated CLO assets had a negative rating bias, which is relatively unchanged from the 19.4% at the start of the year. The breakdown between negative bias, positive bias, and stable for the top 30 GICS sectors is listed in table 4, each weighted by dollar exposure. The bias breakdown per GICS sector is highly sensitive to the rating bias of the issuers with higher CLO exposure, particularly the GICS sectors with less obligors.
The scope: floating S&P-rated CLO assets represent 96% of assets under management in reinvesting U.S. BSL CLOS
The information is based on the aggregation of CLO exposures to corporate issuers as reported in second-quarter 2019 trustee reports of reinvesting U.S. CLOs of BSLs.
S&P Global Ratings' Corporates group issues and maintains credit ratings for the vast majority of companies that issue the loans held in CLOs. As part of our credit rating process, we capture various ratios of the issuer at the time of the rating. We also issue and maintain recovery ratings for the vast majority of loans held in CLOs.
Almost all of the companies that issue loans held in U.S. CLOs are classified within the GICS. These industry classifications are utilized within the CDO Evaluator credit model, which is used by the S&P Global Ratings Structured Finance group's rating process for CLOs.
We aggregate CLO exposures reported in trustee reports available as of the end of second-quarter 2019 and calculate various metrics, weighted by the outstanding par amount of exposures and stratified by the GICS classification of the issuer of the loans. We focused on the floating-rate assets with both an S&P Global Ratings' credit rating and an S&P Global Ratings' recovery rating (the floating S&P-rated CLO assets). These floating S&P-rated CLO assets were issued by over 1,400 corporate issuers operating across 65 GICS industries and represent over 96% of the total par of the CLOs aggregated in this second-quarter 2019 update. The credit rating, recovery rating, spread, price, and leverage ratio values of these floating S&P-rated CLO assets were used to calculate the averages outlined in table 3.
S&P Global Ratings' weighted average rating factor (SPWARF)
The SPWARF of a CLO portfolio provides an indication of the overall credit rating distribution of the portfolio, weighted by each assets par balance. The rating factor for each of the portfolio assets is determined by S&P Global Rating's credit rating (or implied rating) and the rating factor. (The S&P Global Ratings' rating factor of an individual asset is the five-year default rate given its S&P Global Ratings' credit rating and the default table in the Corporate CDO criteria, multiplied by 10,000.) The SPWARF is calculated by multiplying the par balance of each collateral obligation (with a rating from S&P Global Ratings of 'CCC-' or higher) by the S&P Global Ratings rating factor, then summing the total for the portfolio, and then dividing this result by the aggregate principal balance of the collateral obligations included in the calculation.
Weighted average debt to EBITDA (WA debt to EBITDA)
The leverage is based on the assumptions we make around debt and EBITDA, as used in our rating analysis.
- Debt: For the purpose of debt, we include items such as leases (both capital and operating), preferred shares, and accrued dividends.
- EBITDA: Our EBITDA analysis generally adheres to what EBITDA stands for (earnings before interest, taxes, depreciation, and amortization). That is, revenue minus operating expenses plus depreciation and amortization (including noncurrent asset impairment and asset reversal).
Beyond that definition, our decision to include or exclude an activity from EBITDA depends on whether we consider that activity to be operating or non-operating.
Examples of income statement activities classified as operating are included in our EBITDA calculation are:
- Restructuring costs,
- Acquisition-related costs, and
- Interest and depreciation of lease-related expenses.
Examples of income statement activities excluded from our EBITDA calculation:
- Long life asset impairments/write-downs, and
- Nonrecurring items.
For a subset of assets with an S&P Global Ratings' credit rating, the weighted average debt to EBITDA is the sum product of each issuer's debt-to-EBITDA ratio at the time of the rating action and the par exposure of the issuer's debt as a percentage of the sum of the par of the subset of assets.
Weighted average EBITDA interest coverage (WA interest coverage)
For entities with weaker leverage assessments, interest coverage ratios can also shed light into the issuer's ability to service its debt.
We use the EBITDA value, as described above, divided by the carrying cost, or interest burden of the issuer's debt.
For a subset of assets with an S&P Global Ratings' credit rating, the weighted average EBITDA interest coverage is the sum product of each issuer's EBITDA interest coverage ratio at the time of the rating action and the par exposure of the issuer's debt as a percentage of the sum of the par of the subset of assets.
Weighted average recovery rate (WARR)
For a subset of assets with an S&P Global Ratings' recovery rating, the WARR is the sum product of each asset's recovery rate (the number within parenthesis to the right of the recovery rating) and the asset's par exposure as a percentage of the sum of the par of the subset of assets. For more details on S&P Global Ratings' recovery ratings, see "Recovery Rating Criteria For Speculative-Grade Corporate Issuers," published Dec. 7, 2016.
Weighted average spread (WAS)
For a subset of floating-rate assets, the WAS is the sum product of each asset's nominal spread above the base rate and the asset's par exposure as a percentage of the sum of the par of the subset of assets.
Weighted average price (WA price)
For a subset of assets with loan prices, the weighted average price is the sum product of each asset's price at the end of the quarter and the asset's par exposure as a percentage of the sum of the par of the subset of assets.
Data coverage of the floating S&P-rated CLO assets listed in table 3
Because we focus only on floating S&P-rated CLO assets (worth over 96% of the overall assets under management in the sample), by definition, we have full coverage of the data used to calculate the SPWARF, WARR, and WAS in table 3. We have credit ratings, recovery ratings, and spread information for all loans issued by the over 1,400 issuers.
Due to limitations within the various data sources, we did not have complete coverage regarding the price and leverage ratios for all the loans issued by the over 1,400 issuers. We had pricing information for over 99% of the loan and corporate leverage ratio information for over 85% of the loans. The WA price, WA debt to EBITDA, and WA interest coverage values are the weighted average values of the loans for which pricing and leverage ratio data are available.
This report does not constitute a rating action.
|Primary Credit Analysts:||Daniel Hu, FRM, New York (1) 212-438-2206;|
|Ramki Muthukrishnan, New York (1) 212-438-1384;|
|Secondary Contact:||Jimmy N Kobylinski, New York (1) 212-438-6314;|
|U.S. SF Sector Lead:||Stephen A Anderberg, New York (1) 212-438-8991;|
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