CLO Insights 2020 Index: Average Loan Prices Approach Early March Levels After Vaccine Announcements
As noted in "SF Credit Brief: CLO Loan Prices Get A Booster Shot From Vaccine News, Though The O/C Test Impact May Be Modest," published Nov. 17, 2020, corporate loan prices experienced a dramatic increase a couple of weeks ago following positive news on COVID-19. The sectors that rallied the most following the news were, unsurprisingly, consumer-facing sectors that have been most negatively affected by COVID-19, including hotels, restaurants and leisure; entertainment; airlines; and others. The average price of loans in collateralized loan obligation (CLO) portfolios making up the CLO Insights 2020 Index increased to 95, a level not seen since early March, before the pandemic-related shutdowns. If sustained, these higher loan prices may give overcollateralization (O/C) ratios a modest bump, though we note that par balance continues to slightly decline for many CLOs as managers sell loans from distressed issuers below par.
|CLO Index Metrics (CLO Insights 2020 Index)|
|As of date||'B-' (%)||'CCC' category (%)||Nonperforming category (%)||Jr. O/C cushion (%)||Weighted avg. price of portfolio||SPWARF||Par change (%)||Watch negative (%)||Negative outlook (%)||Negative outlook or Watch negative (%)|
|Jan. 1, 2020||19.97||4.11||0.54||3.86||97.45||2644||0.00||1.63||17.36||19.00|
|Feb. 1, 2020||20.20||4.07||0.56||3.80||97.55||2645||(0.04)||1.33||17.66||18.79|
|March 1, 2020||20.16||4.13||0.63||3.76||95.83||2639||(0.07)||1.61||17.18||18.79|
|April 5, 2020||23.47||10.06||0.81||3.73||83.11||2857||(0.10)||10.71||24.37||35.08|
|May 3, 2020||25.40||12.31||1.61||2.38||86.73||2986||(0.23)||9.82||32.56||42.38|
|Oct. 6, 2020||24.84||9.35||1.35||1.76||94.12||2883||(0.69)||2.44||38.60||41.04|
|Nov. 2, 2020||24.52||9.03||1.35||1.90||94.13||2865||(0.78)||2.28||37.52||39.80|
|Nov. 15, 2020||24.63||9.10||1.27||1.93||95.40||2855||(0.83)||2.05||36.00||38.05|
Vintage Matters: Difference In Performance Varies By Year Of CLO Origination
The averages shown in table 1 above can be a good measure of overall performance, but sometimes averages hide the variance across the sample. The CLO Insights 2020 Index is a sample of 410 reinvesting CLOs that are relatively evenly distributed across the four cohorts shown in the following three charts. Breaking the averages out by vintage highlights some interesting trends.
Split by vintage cohorts, we see the earlier vintage CLOs within the Index losing a lot more O/C cushion than the more recent CLOs. The earlier vintage CLOs started the year off with less O/C cushion to begin with; these deals were issued before the energy slowdown in 2015-2016 and eroded some cushion during that period. As CLO junior O/C ratios hit their nadir in June, we see the average junior O/C cushion of the 2015 and prior vintages approach 0%, with roughly half of this cohort failing their O/C tests.
There are also potential patterns that emerge ahead of CLO payment dates, where we see significant declines in par balance in April and July (especially for the 2015 and prior cohorts and the 2016 and 2017 cohorts), perhaps due to sale of loans from 'CCC' rated obligors at values below par. Loans from 'CCC' obligors within broadly syndicated loan (BSL) CLOs are generally haircut for purposes of calculating the O/C ratio tests when they exceed 7.5% of total portfolio par, so sales of these assets and redeployment of the proceeds into higher rated loans may help bring CLO O/C tests back into compliance prior to the payment dates.
Moving from junior O/C ratios and par to credit, we see all of the cohorts, save 2019, started the year off with roughly similar credit quality, as measured by SPWARF, though the credit distribution was different (the 2015 and prior cohorts had higher 'CCC' category exposure, while the 2016, 2017, and 2018 cohorts had higher 'B-' exposure). By July and onward, we see that the 2018 cohort emerged with the highest SPWARF. This was perhaps due to the fact that the 2018 vintage cohort had more O/C cushion at the start of the year, and thus managers did not feel as much pressure to trade out of their 'CCC' assets, which in turn led to the cohort not losing as much par as the earlier vintage CLOs, but instead wound up with a higher SPWARF.
|Downgrade (%)||No downgrade (%)|
|2015 and prior||73.87||26.13|
|2016 and 2017||50.00||50.00|
So far in 2020, 44.6% (183 of the 410 deals) of the CLO Insights index have experienced a rating downgrade on one or more tranches of the CLO. Unsurprisingly, the earlier vintages experienced more CLO rating volatility. The 2019 cohort emerged as the strongest across the Index. They entered 2020 with a stronger credit quality (lower SPWARF) and higher levels of O/C cushion; and so far, they have lost the least amount of par, and had the most CLO rating stability relative to the other cohorts.
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 + (212) 438-8991;|
|Robert E Schulz, CFA, New York + 1 (212) 438 7808;|
|Secondary Contact:||Deegant R Pandya, New York + 1 (212) 438 1289;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: email@example.com.