(Editor's Note: This article is part of a series in which we list companies with loans held in U.S. broadly syndicated CLO collateral pools that have experienced negative rating actions. We will update and republish the list of affected CLO obligors on a periodic basis.)
- Negative rating actions on corporate loan issuers continue to accumulate within U.S. BSL CLOs, though the pace is moderating. More than 27% of U.S. BSL CLO collateral have been downgraded or placed on CreditWatch negative since early March, with 406 tranches across 305 transactions currently on CreditWatch negative.
- The 'CCC' buckets in U.S. BSL CLOs have tripled to 12.3% as of May 3 from about 4% since early March, though the increase has plateaued within the past two weeks. Some deals within the CLO Insights 2020 Index that are failing their junior O/C tests have reported senior note paydowns due to interest diversion mechanics on their April payments.
- The lists of affected U.S. BSL CLO obligors and U.S. CLO tranche ratings on CreditWatch negative as of May 3, 2020, can be downloaded here: https://www.spglobal.com/ratings/_division-assets/excel/76USCLOExposureMay3.xls.
As of May 3, 2020, over 400 of the more than 1,500 obligors held in U.S. broadly syndicated collateralized loan obligations (BSL CLOs) rated by S&P Global Ratings have either been downgraded or placed on CreditWatch with negative implications, or both. This represents more than 27% of the assets held in these transactions. The S&P Global Ratings Weighted Average Rating Factor (SPWARF) of the U.S. BSL CLOs within the CLO Insights 2020 Index increased to 2986 as of May 3 from 2639 at the beginning of March, which means the average CLO asset rating has fallen below the 'B' level of 2860.
Over the past week (April 27 through May 3), S&P Global Ratings has taken negative rating actions on issuers across various sectors found in U.S. BSL CLOs. This included three hotel, restaurant, and leisure issuers and two entertainment issuers (these two sectors represent most of the negative rating actions affecting U.S. BSL CLOs since March).
Assessing The Pace Of Negative Corporate Rating Actions
Over the past few weeks, the number of negative rating actions have begun to moderate, and the mix of rating actions has also changed, with more outlook revisions and fewer downgrades (see table 1). For the week ended May 1, downgrades represented about 33% rating actions, while outlook revisions represented over 60%. However, although the absolute number of rating actions has been declining, companies on CreditWatch negative are candidates for downgrade, as are issuers with negative rating outlooks, albeit over a longer time horizon. About 10% of exposures across the CLO Insights 2020 Index are on CreditWatch negative, while more than 30% have a negative rating outlook (see table 2).
|COVID-19- And Oil Price-Related Public Rating Actions On Corporate, Sovereign, And Project Finance Issuers(i)|
|Weekly distribution of issuers affected (by rating action type)|
|(No. of issuers)|
|CreditWatch negative placements||Downgrades||Downgrades and CreditWatch changes||Outlook revisions||Total|
|Feb. 7, 2020||1||-||-||-||1|
|Feb. 14, 2020||-||1||-||2||5|
|Feb. 21, 2020||1||2||-||3||9|
|Feb. 28, 2020||-||-||-||4||8|
|March 6, 2020||-||1||1||5||12|
|March 13, 2020||4||9||2||8||31|
|March 20, 2020||59||50||42||30||211|
|March 27, 2020||44||129||28||118||437|
|April 2, 2020||42||136||25||106||415|
|April 10, 2020||12||70||15||110||317|
|April 17, 2020||15||95||6||76||268|
|April 24, 2020||6||65||10||96||273|
|May 1, 2020||3||44||5||93||238|
|(i)Data as of May 1, 2020. Note: The rating actions are tracked at the issuer level. If an issuer has had multiple rating actions since Feb. 3, 2020, the last rating action date is shown. Source: S&P Global Ratings Research.|
On April 28, we lowered our ratings on the widely held health care provider and services issuer Envision Healthcare Corp. to 'SD' (selective default). The downgrade followed the settlement of Envision's offer to exchange its senior unsecured notes due in 2026 at about $0.53 on the dollar and its floating-rate private placement notes due in 2026 at $0.55 on the dollar for new secured term debt (see "Envision Healthcare Corp. Downgraded To 'SD', Debt To 'D' On Distressed Exchange," published April 28, 2020). We subsequently raised our ratings on Envision to 'CCC' on May 4, following the completion of the distressed debt exchange (see "Envision Healthcare Corp. Upgraded To 'CCC' From 'SD', Debt Rating Actions Taken; Outlook Negative," published May 4, 2020).
As of May 3, the 'CCC' buckets in U.S. BSL CLOs have exceeded 12%--a significant increase from 4.1% at the beginning of March (see table 2). However, the increase in the 'CCC' buckets has slowed somewhat within the past two weeks, given the reduced pace of corporate downgrades during that time.
|CLO Index Metrics (CLO Insights 2020 Index)|
|'B-' (%)||'CCC' category (%)||Nonperforming category (%)||Junior O/C cushion (%)||Weighted avg. price of portfolio||SPWARF||Par change (%)||CreditWatch negative (%)||Negative outlook (%)|
|Jan. 1, 2020||19.97||4.11||0.54||3.86||97.45||2644||0.00||1.63||17.36|
|Feb. 1, 2020||20.20||4.07||0.56||3.80||97.55||2645||(0.04)||1.33||17.66|
|March 1, 2020||20.16||4.13||0.63||3.76||95.83||2639||(0.07)||1.61||17.18|
|March 20, 2020||22.91||6.92||0.65||3.74||79.53||2753||(0.09)||8.47||18.85|
|March 29, 2020||23.23||8.43||0.72||3.74||80.92||2807||(0.09)||9.89||20.86|
|April 5, 2020||23.47||10.06||0.81||3.73||83.11||2857||(0.10)||10.71||24.37|
|April 12, 2020||23.86||10.91||1.36||3.72||86.22||2923||(0.10)||10.62||27.40|
|April 19, 2020||23.83||11.84||1.66||3.59||87.32||2965||(0.10)||9.92||29.79|
|April 26, 2020||24.47||12.10||1.65||3.00||86.80||2975||(0.17)||10.07||32.18|
|May 3, 2020||25.40||12.31||1.61||2.38||86.73||2986||(0.23)||9.82||32.56|
|Note: The CLO Insights 2020 Index is an index of 410 S&P Global Ratings rated U.S. BSL CLOs that will be reinvesting for all of 2020. BSL CLO--Broadly syndicated loan collateralized loan obligation. O/C--Overcollateralization. SPWARF--S&P Global Ratings weighted average rating factor.|
Most U.S. BSL CLOs have an allowable bucket of 7.5% for loans from 'CCC'-rated obligors. Above that amount, there is no forced sale of assets. But the excess 'CCC' loans above the 7.5% threshold are carried at market value rather than par value for purposes of calculating the CLO overcollateralization (O/C) ratio tests. The increase in loans from 'CCC'-rated obligors, combined with low loan prices from 'CCC'-rated issuers, will likely reduce the cushion for U.S. CLO junior O/C ratio tests as the April CLO trustee reports are issued in the coming weeks.
As the late March 2020 trustee reports are being processed, we see that average junior O/C cushions are beginning to decline, falling to 2.4% across the CLO Insights 2020 Index from 3.8% at the start of the year. Some deals have experienced several percentage point declines from prior-month reports, while others have eroded all of their O/C cushion within one month. Within the trustee reports we have processed as of May 3, about 90 of the U.S. BSL CLOs rated by S&P Global Ratings are failing one or more of their O/C tests (including amortizing CLOs). As more late March and early April reports roll in, we expect the average cushion for the CLO Insights 2020 Index will continue to decline.
As the April payment reports are being processed, we note that the senior notes of reinvesting CLOs are beginning to experience paydowns due to interest diversion. Of the approximately 30 deals with processed April payment reports, the average pay down to the senior notes is about 0.73% (as a percentage of the original balance of the senior notes), and about half of these deals also saw interest deferrals, on average, worth about 2.04% (as a percentage of the original balance of the deferrable notes).
As of May 3, 406 tranches across 305 U.S. BSL CLOs we rate have ratings on CreditWatch negative. Due to the high volume of resets in past years, there is a wider range of vintages that are still outstanding. Most of the U.S. BSL CLOs on CreditWatch negative originally closed before the energy slowdown (2015 vintage and prior), while more recent vintages make a smaller proportion of the other deals on CreditWatch negative (see table 3). Because the transactions that closed in 2015 and prior have seasoned through the energy slowdown, their already weaker portfolio metrics are now more vulnerable, given the current economic conditions.
|CreditWatch Breakdown By Vintage|
|Original vintage||No. of CLOs with one or more ratings on CreditWatch negative|
|2015 and prior||170|
|2016 and 2017||47|
|2018 and after||88|
|CLO--Collateralized loan obligfation.|
Copy and paste the URL below into your browser to download lists of the negative rating actions take this year on U.S. BSL CLO obligors and U.S. CLO tranches as of May 3, 2020, which we will update periodically as circumstances warrant:
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
- Envision Healthcare Corp. Upgraded To 'CCC' From 'SD', Debt Rating Actions Taken; Outlook Negative, May 4, 2020
- Envision Healthcare Corp. Downgraded To 'SD', Debt To 'D' On Distressed Exchange, April 28, 2020
- Mister Car Wash Holdings Inc. Upgraded To 'CCC+' From 'SD' Post Debt Restructuring; Outlook Negative, April 20, 2020
- Ratings On 155 Classes From 113 U.S. Reinvesting CLOs Placed On Watch Negative, April 17, 2020
- Economic Research: An Already Historic U.S. Downturn Now Looks Even Worse, April 16, 2020
- Mister Car Wash Holdings Inc. Downgraded To 'SD' From 'CCC+' On Distressed Debt Restructuring, April 16, 2020
- 48 Ratings On 35 U.S. CLOs With Large Exposure to 'CCC' Rated Assets Placed On CreditWatch Negative, April 3, 2020
- 22 Ratings on 15 U.S. Reinvesting CLOs Exposed To Downgrades And Stressed Sectors Placed On CreditWatch Negative," March 27, 2020
- Global Macroeconomic Update, March 24: A Massive Hit To World Economic Growth, March 24, 2020
- Leveraged Finance: Issuer Spotlight: Top-250 CLO Obligors (Various Ratings Actions Taken In Gaming Sectors), March 23, 2020
- 25 Ratings On 15 U.S. CLO Transactions With Larger Exposures To Energy-Related Sectors Placed On Watch Negative, March 20, 2020.
- American Airlines Group And Subsidiary Downgraded To 'B' On Steeply Lower Demand Due To Coronavirus; Remain On Watch Neg, March 20, 2020
- Global IT Spending Set To Slide As Coronavirus Hits Hardware Sales, March 19, 2020
- Coronavirus Will Put U.S. CLO Diversity And Managers To The Test, March 13, 2020.
- Sector Averages Of Reinvesting U.S. BSL CLO Assets: Credit Quality Deteriorated In Fourth-Quarter 2019 As Loan Prices And Spreads Increased, Feb. 4, 2020
This report does not constitute a rating action.
|Primary Contacts:||Daniel Hu, FRM, New York + 1 (212) 438 2206;|
|Stephen A Anderberg, New York (1) 212-438-8991;|
|Robert E Schulz, CFA, New York (1) 212-438-7808;|
|Ramki Muthukrishnan, New York (1) 212-438-1384;|
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