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SF Credit Brief: CLO Loan Prices Increase; Difference In Performances Across Vintages Emerge

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U.S. Residential Mortgage And Housing Outlook: Positive Momentum Carries Into 2021

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Servicer Evaluation: Brean Real Estate Solutions LLC

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Quote Book: Gleaning Sector Trends From Rating Actions For BSL CLO Market Participants (As Of Jan. 15, 2021)

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SF Credit Brief: Review Of 2020 U.S. CLO Insights Index Published


SF Credit Brief: CLO Loan Prices Increase; Difference In Performances Across Vintages Emerge

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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.

Table 1

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
June 8,2020 25.71 11.86 1.35 1.13 91.90 2960 (0.34) 8.42 36.34 44.76
July 06,2020 24.82 11.41 1.53 1.39 91.14 2951 (0.39) 6.42 37.60 44.02
Aug. 2,2020 24.35 10.66 1.57 1.48 92.60 2925 (0.55) 5.76 38.69 44.45
Sept. 7,2020 24.36 10.10 1.39 1.56 94.41 2900 (0.66) 4.57 38.32 42.89
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
O/C--Overcollateralization.

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.

Chart 1

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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.

Chart 2

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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.

Chart 3

image

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.

Table 2

Downgrades
Downgrade (%) No downgrade (%)
2015 and prior 73.87 26.13
2016 and 2017 50.00 50.00
2018 33.60 66.40
2019 13.16 86.84
Total 44.63 55.37

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;
daniel.hu@spglobal.com
Stephen A Anderberg, New York + (212) 438-8991;
stephen.anderberg@spglobal.com
Robert E Schulz, CFA, New York + 1 (212) 438 7808;
robert.schulz@spglobal.com
Secondary Contact:Deegant R Pandya, New York + 1 (212) 438 1289;
deegant.pandya@spglobal.com

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