(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.)
Key Takeaways
- The number of negative rating actions on corporate loan issuers within U.S. BSL CLOs increased by 10 last week, maintaining the moderate pace seen since mid-April.
- Since early March, more than 28% of U.S. BSL CLO collateral have been downgraded or placed on CreditWatch negative, the 'CCC' buckets have tripled to 12.3% from about 4% (though the pace has slowed), and 418 tranches across 316 CLO transactions are currently on CreditWatch negative.
- The CLO structures are working as intended during periods of economic stress: about 10% of CLOs within the CLO Insights 2020 Index with failing junior O/C tests have begun diverting interest proceeds away from equity holders to reduce the outstanding balance of the CLO senior notes.
As of May 17, 2020, over 450 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 28% of the assets held in these transactions.
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.
Assessing The Pace Of Negative Corporate Rating Actions
Over the past few weeks, the number of negative rating actions has declined consistently from the volumes seen in late March and early April (see table 1). For the week ended May 15, the number of downgrades and outlook revisions declined, while the number of ratings placed on CreditWatch negative increased to four from two. However, this increase was far below the 40 to 50 equivalent rating actions per week seen in late March. About 9% of exposures across the CLO Insights 2020 Index are on CreditWatch negative, while more than 30% have a negative rating outlook (see table 2).
Table 1
| Weekly Distribution Of Issuers Affected By COVID-19 And Oil Prices By Rating Action Type | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (No. of issuers) | ||||||||||||
| Downgrades and CreditWatch changes | Downgrades | CreditWatch negative placements | Outlook revisions | Total rating actions | ||||||||
| Feb. 7, 2020 | - | - | 1 | 1 | ||||||||
| Feb. 14, 2020 | 1 | - | 2 | 3 | ||||||||
| Feb. 21, 2020 | - | 2 | 1 | 3 | 6 | |||||||
| Feb. 28, 2020 | - | - | - | 2 | 2 | |||||||
| March 6, 2020 | 2 | - | - | 5 | 7 | |||||||
| March 13, 2020 | 3 | 7 | 3 | 8 | 21 | |||||||
| March 20, 2020 | 43 | 48 | 53 | 29 | 173 | |||||||
| March 27, 2020 | 30 | 127 | 44 | 117 | 318 | |||||||
| April 2, 2020 | 27 | 133 | 42 | 106 | 308 | |||||||
| April 10, 2020 | 21 | 64 | 12 | 110 | 207 | |||||||
| April 17, 2020 | 11 | 90 | 15 | 76 | 192 | |||||||
| April 24, 2020 | 13 | 62 | 6 | 96 | 177 | |||||||
| May 1, 2020 | 5 | 43 | 3 | 92 | 143 | |||||||
| May 8, 2020 | 10 | 53 | 2 | 46 | 111 | |||||||
| May 15, 2020 | - | 36 | 4 | 35 | 75 | |||||||
| (i)Data as of May 15, 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. | ||||||||||||
The increase in the 'CCC' buckets in U.S. BSL CLOs has slowed somewhat, remaining in the low-12% area for the past four weeks, partially due to the reduced pace of corporate downgrades during that time. We note that some deals across the index have experienced a notable decline in par balance (on average, 25 basis points lower relative to the start of 2020), indicating that managers may be selling weaker assets at less than par, which is perhaps partly why the 'CCC' buckets have stabilized. Meanwhile, another smaller cohort of deals have experienced par gains from purchases at below par (particularly for deals that entered COVID with more principal cash at hand), while other deals saw a slight bump in par as interest cash was diverted to reinvest into new assets (i.e., they had interest diversion test failures but not tranche O/C test failures).
Table 2
| 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 | |||||||||||
| May 10, 2020 | 25.67 | 12.33 | 1.27 | 2.14 | 87.08 | 2971 | (0.25) | 9.24 | 34.16 | |||||||||||
| May 17, 2020 | 25.91 | 12.23 | 1.29 | 2.04 | 87.51 | 2971 | (0.25) | 9.25 | 35.03 | |||||||||||
| 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. | ||||||||||||||||||||
As the April trustee reports are being processed, we see that average junior O/C cushions are beginning to decline and have fell to 2.0% 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 reports, while others have eroded all of their O/C cushion. Within the trustee reports we processed as of May 17, about 110 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). Given the 'CCC' exposures and that loan prices have stabilized somewhat within the past few weeks, we expect the average cushion for the CLO Insights 2020 Index may also stabilize for the current month.
As the April payment reports are being processed, we note that some senior notes of reinvesting CLOs are beginning to experience paydowns due to interest diversion. Of the transactions that have both processed April payment reports and failing O/C tests, on average, 40 experienced paydowns to the senior notes, which represent about 0.7% of the original balance of the senior notes, and 22 transactions also saw interest deferrals, which represent about 2.2% of the original balance of the deferrable notes.
As of May 17, 418 tranches across 316 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 represent 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.
Table 3
| CreditWatch Breakdown By Vintage | ||||
|---|---|---|---|---|
| Original vintage | No. of CLOs with one or more ratings on CreditWatch negative | |||
| 2015 and prior | 173 | |||
| 2016 and 2017 | 52 | |||
| 2018 and after | 91 | |||
| Total | 316 | |||
| CLO--Collateralized loan obligation. | ||||
Copy and paste the URL below into your browser to download lists of negative rating actions take this year on U.S. BSL CLO obligors and U.S. CLO tranches as of May 17, 2020, which we will update periodically as circumstances warrant:
https://www.spglobal.com/ratings/_division-assets/excel/80USCLOExposureMay17.xls
Related Research
- 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; daniel.hu@spglobal.com |
| Stephen A Anderberg, New York (1) 212-438-8991; stephen.anderberg@spglobal.com | |
| Robert E Schulz, CFA, New York (1) 212-438-7808; robert.schulz@spglobal.com | |
| Ramki Muthukrishnan, New York (1) 212-438-1384; ramki.muthukrishnan@spglobal.com |
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