(Editor's Note: This article reflects CLO collateral information as of June 30, 2020. Due to a substantial volume of corporate rating actions and changes in loan prices in recent weeks, current metrics have shifted materially. We're publishing this report to maintain consistency with our previously published quarterly updates.)
Broadly syndicated loan collateral loan obligations (BSL CLOs) benefit from portfolio diversification, both from an issuer and sector perspective, with most BSL CLO managers maintaining portfolios of leveraged loans that have an average exposure to 200 different corporate issuers operating across 24 different industry categories. Our analysis for this article focuses on the loans issued by over 1,300 corporate issuers, representing over 95% of the assets under management (AUM) currently held in the 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 Global Ratings-rated CLO assets), weighted by the dollar exposure to each asset.
Our analysis of reinvesting U.S. BSL CLO portfolio exposures included average values over time for key credit metrics (see table 1, as well as the Appendix for calculation specifics). Those metrics are:
- Issuer count: the obligor count across the transactions;
- SPWARF: the S&P Global Ratings' weighted average rating factor for the CLO collateral, with a higher value indicating a lower average rating across the transactions;
- WARR: the weighted average recovery rate for the loans in the portfolios, as implied by the corporate recovery rating we have assigned to each loan;
- WAS: the weighted average spread over LIBOR of the loans in each CLO portfolio; and
- WAP: the weighted average price of the loans in each CLO portfolio based on market sources.
|Floating-Rate CLO Assets With Derived S&P Global Ratings' Credit Rating And Recovery Rating(i)|
|Quarter||Issuer count (no.)||SPWARF||WARR (%)||WAS (%)||WAP|
|(i)See the appendix for detailed explanations of these metrics. SPWARF--S&P weighted average rating factor. WARR--Weighted average recovery ratio. WAS--Weighted average spread. WAP--Weighted average price.|
Key Changes Due To A World With COVID-19
- Credit quality of CLO assets deteriorated across a number of corporate sectors due to downgrades and negative CreditWatch placements resulting from the economic and credit impact of COVID-19. The pace of negative rating actions on corporate entities whose loans back S&P Global Ratings-rated CLOs slowed down after peaking in the beginning of the quarter.
- During first and second quarters, about one third of the issuers whose loans are held in U.S. BSL CLOs had their ratings lowered or placed on CreditWatch.
- Due to changes in companies' capital structures (issuance of additional debt and resulting increased leverage, full draw of revolver, etc.), a number of corporate recovery ratings (and the resulting recovery assumption used in our CLO analysis) dropped in the second quarter.
- The WAP of the loans in our CLO portfolios have tracked the trajectory of the broader markets. After dropping to 82 cents to the dollar, they recovered and appear to have stabilized at around 91 cents to the dollar.
- The proportion of CLO collateral with a negative bias (negative outlook or Creditwatch negative) has increased to 43%, up from 32% at the end of first-quarter 2020.
Another Turn Of Leverage After COVID-19 In The Second Quarter
COVID-19-related containment measures caused significant declines in revenues and earnings for many of the corporate loan issuers within U.S. CLOs, and some of these companies came to capital markets to raise debt-financed liquidity to survive though the crisis. This had an impact on companies' leverage that was assumed for our corporate credit rating reviews. Tables 2 and 3 below shows the average leverage ratios for 640 issuers reviewed during March and second-quarter of 2020 compared to the most recent rating review prior to COVID-19.
For these 640 companies that had a rating review during COVID-19, leverage has increased by about 1.3 turns on average relative to pre-COVID-19 levels. As a result of these reviews, about 55% of our sample of 640 issuers experienced a rating downgrade. For the entities that had their ratings lowered, leverage increased by about two turns on average; meanwhile, leveraged increased by about a half turn on average for the issuers that were not downgraded.
|Average Leverage Ratios|
|Average leverage from review before COVID-19||Average leverage from review during COVID-19(i)||Average change in leverage|
|(i)Between March 1, 2020, and June 30, 2020.|
Leverage and rating shifts varied across sectors
For the sample of 640 issuers reviewed during COVID-19, with the average increase in leverage of 1.3 turns, we find the overall average rating movement was 0.84 notches downward. About 55% of these issuers saw ratings lowered, while around 45% did not. To arrive at our overall ratings movement of 0.84 notches downward, we averaged in zero notch movement for issuers that had their ratings affirmed.
When we break down the actions by the Global Industry Classification Standard (GICS) classification of the issuer, we find the count of issuers reviewed, the change in leverage, and the average notch movement differed notably across the various GICS industry categories. For example, issuers classified under GICS as hotels/restaurants/leisure saw the highest number of rating updates within our sample, with 64 issuers reviewed (or 10% of the overall sample). These 64 issuers experienced, on average, an increase in leverage of 1.8 turns (half a turn higher than the overall average increase of 1.3). As result of these reviews, the average rating movement was 1.25 notches downward for these hotels/restaurants/leisure issuers (greater than the overall average rating movement of 0.84 notches down, meaning several hotels/restaurant/leisure issuers saw multi-notch downgrades).
Meanwhile, recent rating reviews of 21 auto component issuers revealed leveraged had increased by over two turns during COVID-19.
|Average Leverage Ratios By GICS|
|GICS industry||Average leverage from review before COVID-19||Average leverage from review during COVID-19(i)||Average change in leverage||Issuer count (no.)||Downgrade||No downgrade||Avg. notch|
|Hotels, restaurants, and leisure||6.25||8.05||1.81||64||46||18||(1.25)|
|Healthcare providers and services||7.57||8.31||0.74||34||12||22||(0.47)|
|Commercial services and supplies||5.40||6.12||0.72||31||14||17||(0.55)|
|Trading companies and distributors||5.39||6.71||1.32||18||7||11||(0.44)|
|Oil, gas, and consumable fuels||4.00||5.78||1.78||15||11||4||(1.80)|
|Diversified consumer services||6.74||7.38||0.64||14||8||6||(0.71)|
|Aerospace and defense||5.65||6.87||1.22||13||9||4||(0.85)|
|Containers and packaging||6.16||7.46||1.30||12||7||5||(0.92)|
|Textiles, apparel, and luxury goods||5.17||5.35||0.18||12||7||5||(0.92)|
|Healthcare equipment and supplies||6.22||7.49||1.27||11||6||5||(0.73)|
|Construction and engineering||5.99||6.70||0.70||9||5||4||(0.67)|
|Electronic equipment, instruments, and components||5.16||6.22||1.06||8||5||3||(0.88)|
|Metals and mining||5.14||6.79||1.65||8||7||1||(1.25)|
|Diversified telecommunication services||5.81||6.25||0.45||7||5||2||(1.57)|
|Technology hardware, storage, and peripherals||5.54||5.68||0.14||7||3||4||(0.43)|
|Air freight and logistics||5.83||6.67||0.84||6||1||5||(0.17)|
|Energy equipment and services||3.47||5.32||1.84||6||4||2||(2.17)|
|(i)Between March 1, 2020, and June 30, 2020. GICS--Global Industry Classification Standard.|
CLO Assets Weighted By Exposure
Weighted average metrics
Our analysis focuses on a pool of loans issued by more than 1,300 corporate issuers, representing over 95% of the AUM currently held in reinvesting U.S. BSL CLOs rated by S&P Global Ratings. For each sector, we calculated the average metrics for all the floating S&P Global Ratings-rated CLO assets, weighted by the dollar exposure to each asset. These metrics include the SPWARF, WARR, WAS, and WAP (see table 1 and the Appendix).
Average metrics per industry
We observed that the corporate issuers operating within various industries have different credit profiles, and the loans they issue also have different characteristics. Using CLO exposures for these floating S&P Global Ratings-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|
|GICS||Issuer count (no.)||Exposure (%)||SPWARF||WARR||WAS||WAP||% on Watch Negative||% negative outlook|
|Healthcare providers and services||82||6.34||3,234||59.50||3.72||90.82||9.94||26.23|
|Hotels, restaurants, and leisure||80||5.75||3,272||68.73||3.24||87.77||19.30||60.12|
|Diversified telecommunication services||32||4.83||2,515||65.97||3.04||94.01||0.00||30.82|
|Commercial services and supplies||57||3.45||2,932||62.20||3.61||92.77||7.41||47.13|
|Containers and packaging||27||2.55||2,568||58.49||3.12||93.91||0.00||28.58|
|Trading companies and distributors||38||2.50||2,694||60.21||3.42||93.83||2.20||38.88|
|Oil, gas, and consumable fuels||35||1.92||3,178||64.76||3.94||80.07||0.77||42.67|
|Aerospace and defense||23||1.82||2,743||51.99||3.39||88.74||1.59||75.83|
|Health care technology||17||1.71||2,801||63.65||3.85||95.39||0.28||15.88|
|Diversified consumer services||24||1.61||3,287||61.29||3.53||91.87||0.56||61.47|
|Electronic equipment, instruments, and components||18||1.52||2,388||61.36||3.12||93.05||0.03||45.00|
|Project finance: power||25||1.17||1,968||70.84||4.32||92.59||0.00||14.77|
|Life sciences tools and services||14||1.09||2,625||58.12||3.52||96.97||0.00||18.38|
|Real estate management and development||11||1.06||2,342||69.29||2.86||92.08||4.38||32.24|
|Healthcare equipment and supplies||19||1.01||3,714||57.30||4.24||90.19||16.89||20.20|
|Construction and engineering||20||1.00||3,105||48.22||3.96||91.63||0.00||33.46|
|Metals and mining||17||0.95||2,853||58.23||3.45||91.75||0.37||24.97|
|Road and rail||12||0.83||2,936||63.29||3.72||92.34||13.55||27.77|
|Independent power and renewable electricity producers||8||0.80||2,105||87.19||2.88||96.51||0.00||8.98|
|Technology hardware, storage, and peripherals||10||0.71||2,457||63.90||3.56||93.23||0.00||44.30|
|Interactive media and services||11||0.69||3,116||58.95||3.80||94.74||21.03||3.73|
|Food and staples retailing||11||0.64||2,298||62.20||3.82||94.46||21.41||41.36|
|Semiconductors and semiconductor equipment||12||0.58||2,461||60.54||2.53||86.07||17.81||16.82|
|Wireless telecommunication services||4||0.55||1,474||81.91||3.24||96.99||0.00||31.45|
|Air freight and logistics||10||0.45||2,369||66.73||3.58||92.48||0.00||22.15|
|Internet and direct marketing retail||6||0.36||3,814||51.33||3.82||86.30||0.00||76.57|
|Textiles, apparel, and luxury goods||16||0.36||3,357||59.61||4.98||80.28||10.84||53.72|
|Energy equipment and services||9||0.32||6,270||65.28||4.20||68.05||0.00||33.36|
|Thrifts and mortgage finance||5||0.15||3,487||67.99||4.02||91.98||18.24||19.86|
|Equity real estate investment trusts (REITs)||4||0.15||1,699||81.74||1.97||93.78||0.00||100.00|
|Project finance: oil and gas||3||0.13||1,600||87.46||4.06||93.00||0.00||32.23|
|Paper and forest products||3||0.07||2,486||76.83||4.48||95.42||0.00||43.67|
|GICS--Global Industry Classification Standard.|
Ratings bias per GICS sector
At the end of the second quarter, 43.5% of the floating S&P Global Ratings-rated CLO assets had a negative rating bias, up sharply from the 31.9% last quarter. We also examined the breakdown between negative bias, positive bias, and stable for the top 30 GICS sectors, each weighted by dollar exposure (see chart 1). The bias breakdown per GICS sector can be sensitive to the rating bias of the issuers with higher CLO exposure, particularly the GICS sectors with less obligors. The negative bias has increased significantly at the time of this publication (see "U.S. CLO Exposure To Negative Corporate Rating Actions (As Of July 12, 2020)," published July 14, 2020).
The scope: floating S&P Global Ratings-rated CLO assets, representing 95% of AUM in reinvesting U.S. BSL CLOs.
The information is based on the aggregation of CLO exposures to corporate issuers as reported in second-quarter 2020 trustee reports of reinvesting U.S. CLOs of BSLs.
S&P Global Ratings' corporate 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 S&P Global Ratings' structured finance group uses in its rating process for CLOs.
We aggregate CLO exposures reported in trustee reports available as of the end of second-quarter 2020 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 and recovery rating. These floating S&P Global Ratings-rated CLO assets were issued by just less than 1,400 corporate issuers operating across various GICS industries and represent over 95% of the total par of the CLOs aggregated in this second-quarter 2020 update. The credit rating, recovery rating, spread, price, creditwatch, and outlook values of these floating S&P Global Ratings-rated CLO assets were used to calculate the averages outlined in table 3.
The four metrics we use in our analysis are listed below.
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 asset's 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. (An individual asset's S&P Global Ratings rating factor is the five-year default rate, given the asset's 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 by the S&P Global Ratings rating factor (including exposures to issuers with a non-performing rating: 'CC', 'SD' and 'D', each with a rating factor of 10,000), then summing the total for the portfolio and dividing this result by the aggregate principal balance of the collateral obligations included in the calculation.
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 (WAP)
For a subset of assets with loan prices, the WAP 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 Global Ratings-rated CLO assets listed in table 3
Because we focus only on floating S&P Global Ratings-rated CLO assets (which represent over 95% of the overall AUM 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 1,300-plus issuers. We had pricing information for over 99% of the loans.
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;|
|U.S. Leveraged Loan Sector Lead:||Robert E Schulz, CFA, New York (1) 212-438-7808;|
|U.S. CLO Sector Lead:||Stephen A Anderberg, New York (1) 212-438-8991;|
|U.S. CLO Analytical Manager:||Jimmy N Kobylinski, New York (1) 212-438-6314;|
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