Loan market prices rallied on Monday, Nov. 9, following multiple developments over the weekend. These included Pfizer Inc. (A+/Stable/A-1+) and partner BioNTech (not rated) announcement that the first interim analysis of the Phase 3 clinical trial for their COVID-19 vaccine (which has more than 40,000 participants) found the vaccine was more than 90% effective and that no serious side effects were observed.
Our base case assumption for recovery from the pandemic remains unchanged: S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
While the credit impact of this news may be limited, prices on risky assets rose sharply, and broadly syndicated loans (BSLs) were no exception. Across the more than 2,000 loans held within the 410 BSL collateralized loan obligations (CLOs) in the CLO Insights 2020 Index (the CLO Index), the average loan price increased by about 75 basis points--one of the largest single-day increases in recent memory.
The chart below shows this price change across the various Global Industry Classification Standard (GICS) sectors, sorted from the highest exposure (the largest sector held within BSL CLOs) to the lowest exposure. Perhaps unsurprisingly, we see that loans in the sectors most affected by COVID-19-related social distancing measures saw the largest price increases. These include airline loans (up 3.29), entertainment loans (up 2.62), and hotels, restaurants, and leisure loans (up 1.63).
If sustained, the bump in loan price may have a slight positive impact on overcollateralization (O/C) cushions. As of this week, the average 'CCC' rated bucket in the CLO Index was just above 9.0%, which is not much higher than the 7.5% 'CCC' limit in most BSL CLOs. Above this limit, most CLOs carry 'CCC' rated assets at market value rather than par. With the average CLO being only a bit over the 7.5% 'CCC' asset limit, the increase in loan prices may have only a slight positive benefit for O/C cushions for some CLOs.
It is important to note that an abrupt increase in loan prices may increase the cost of building new loan portfolios. A shift in loan prices may impact various dynamics within the new issue process. Some deals currently within the new issue pipeline may see their pricing and closing dates pushed back slightly, even though the current pipeline remains robust.
This report does not constitute a rating action.
|Primary Credit Analysts:||Daniel Hu, FRM, New York + 1 (212) 438 2206;|
|Stephen A Anderberg, New York (1) 212-438-8991;|
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