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CLO Spotlight: U.S. BSL CLO Assets Began Showing Signs Of Stability In The Third Quarter

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CLO Spotlight: U.S. BSL CLO Assets Began Showing Signs Of Stability In The Third Quarter

Broadly syndicated loan collateral loan obligations (BSL CLOs) benefit from both issuer and industry portfolio diversification, with most BSL CLO managers maintaining portfolios of leveraged loans that have, on average, exposure to 200 different corporate issuers operating across 24 different industry categories. Our analysis for this report 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 and 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.

Table 1

Floating-Rate CLO Assets With Derived S&P Global Ratings' Credit Rating And Recovery Rating(i)
Quarter Issuer count (no.) SPWARF WARR (%) WAS (%) WAP
Q3 2018 1583 2553 64.81 3.42 99.16
Q4 2018 1614 2572 64.57 3.42 94.68
Q1 2019 1428 2562 64.64 3.44 97.00
Q2 2019 1431 2584 64.22 3.46 97.15
Q3 2019 1417 2640 63.95 3.49 96.73
Q4 2019 1362 2680 63.61 3.56 97.35
Q1 2020 1373 2826 63.26 3.52 82.02
Q2 2020 1344 2948 62.14 3.50 91.28
Q3 2020 1333 2860 62.16 3.52 94.76
(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.

Some Stabilization And Fewer Downgrades

  • After deteriorating for most of the second quarter, the credit quality of U.S. BSL CLO assets showed some signs of stabilization in third quarter: The downgrade count slowed and there have been some pockets of upgrades.
  • Most of the CreditWatch negative placements on U.S. BSL CLO assets have been resolved, with many ratings affirmed though with negative outlooks.
  • Due to changes in companies' capital structures (issuance of pari passu high-yield debt), expected recoveries (and the resulting recovery assumption used in our CLO analysis) declined for the senior secured loans. However, the WARR of U.S. BSL CLO exposures held steady during the quarter.
  • The WAP of the loans in our U.S. BSL CLO portfolios have tracked the trajectory of the broader loan markets. They recovered to about 95 cents to the dollar in the third quarter after dropping to 82 cents to the dollar in the first quarter.
  • The proportion of U.S. BSL CLO collateral with a negative bias (negative outlook or on CreditWatch negative) decreased slightly to 40% in the third quarter from 43% in the second quarter.

Some Industries Saw Increased 'CCC+' And Below Exposures

At the beginning of the year, only three of the Global Industry Classification Standard (GICS) industries most prominently held within U.S. BSL CLO portfolios had more than 10% (dollar weighted by the CLO exposures) of their respective exposures to issuers rated 'CCC+' and below. These were specialty health care equipment and supplies (14.51%), oil, gas, and consumable fuels (13.93%), and retail (12.541%) industries. By the third quarter, the count had increased to 11 industries, including entertainment (37.13%), diversified consumer services (26.38%), and hotels, restaurants and leisure (23.41%) (see table 2).

Very few of the airline issuers are currently in the 'CCC' rating category, even though the COVID-19 pandemic directly affected the airlines industry. Also, four industries (diversified telecommunication services, commercial services and supplies, food products, and pharmaceuticals) saw a reduction in their respective CLO exposures to issuers that were rated 'CCC+' and below since the start of the year, partially due to the resiliency of these issuers and trading activity from the CLO managers.

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.

Table 2

Proportion Of Industry Exposure To Issuers Rated 'CCC+' And Below (Weighted By U.S. BLS CLO Exposure)
GICS industry 'CCC' and below (% as of Jan. 1, 2020) 'CCC' category and below (% as of Sept. 30, 2020)
Software 4.45 8.26
Health care providers and services 1.71 11.39
Media 3.92 12.00
Hotels, restaurants, and leisure 2.36 23.41
Diversified telecommunication services 2.29 0.79
IT services 5.49 16.98
Insurance 0.01 0.00
Chemicals 1.66 5.18
Commercial services and supplies 8.72 8.18
Machinery 1.83 9.36
Specialty retail 12.54 17.41
Entertainment 2.92 37.13
Containers and packaging 5.32 5.84
Trading companies and distributors 2.45 5.25
Capital markets 2.34 2.12
Aerospace and defense 3.22 3.30
Food products 7.73 0.96
Oil, gas, and consumable fuels 13.93 18.89
Pharmaceuticals 7.47 5.88
Health care technology 2.29 4.01
Professional services 5.79 10.42
Building products 0.02 0.00
Diversified consumer services 0.06 26.38
Electronic equipment, instruments, and components 0.10 5.22
Project finance: power 2.83 3.63
Auto components 5.63 17.35
Airlines 0.00 0.46
Life sciences tools and services 0.23 0.60
Real estate management and development 1.51 4.56
Health care equipment and supplies 14.51 20.18
Construction and engineering 1.79 1.65
GICS--Global Industry Classification Standard.

S&P Global Ratings took rating actions, primarily affirmations, on 320 issuers with loans held in U.S. BSL CLOs between July and mid-November. Within this sample of CLO exposures, the average leverage increased marginally by 0.15x (see table 3). By comparison, average leverage increased 1.3x across a sample of 640 issuers we reviewed in the second quarter, of which more than half resulted in downgrades.

Table 3

Average Leverage Ratios(i)
Rating action Issuer count in sample Average leverage from review before June 30, 2020 Average leverage from review after June 30, 2020(i) Change in leverage
Downgrade 58 6.72 8.21 1.49
No dowgrade 262 6.82 6.67 (0.15)
Total 320 6.80 6.95 0.15
(i)Review between July 1, 2020, and Nov. 18, 2020.

Still, despite the stability in leverage across these 320 issuers, we continue to see significant increases in leverage from consumer facing issuers (see table 4).

Table 4

Average Leverage Ratios By Industry
GICS industry Average leverage from review before June 30, 2020 Average leverage from review after June 30, 2020(i) Issuer count (no.) Downgrade(i) No downgrade(i)
Health care providers and services 8.35 8.20 22 1 21
Software 8.33 8.64 21 2 19
Hotels, restaurants, and leisure 7.50 8.73 20 5 15
Commercial services and supplies 6.08 5.91 16 4 12
Specialty retail 6.58 6.13 16 3 13
Auto components 6.32 5.96 15 1 14
IT services 5.68 5.72 14 2 12
Food products 7.16 6.65 13 1 12
Machinery 7.06 6.64 12 4 8
Entertainment 6.84 9.38 11 6 5
Chemicals 5.87 6.04 10 4 6
Media 7.20 7.92 10 4 6
Trading companies and distributors 6.57 7.49 8 2 6
Aerospace and defense 7.46 7.44 7 1 6
Diversified consumer services 8.00 8.49 7 1 6
Interactive media and services 6.86 6.56 7 0 7
Airlines 5.80 6.97 6 2 4
Containers and packaging 7.42 6.45 6 0 6
Life sciences tools and services 6.86 6.95 6 1 5
Oil, gas, and consumable fuels 5.36 5.77 6 4 2
Textiles, apparel, and luxury goods 6.21 9.79 6 1 5
Building products 6.07 5.43 5 0 5
Construction and engineering 5.35 3.92 5 0 5
Diversified telecommunication services 6.84 6.74 5 0 5
Electronic equipment, instruments, and components 4.09 4.51 5 1 4
Food and staples retailing 6.14 5.64 5 1 4
Household durables 8.32 6.70 4 0 4
Leisure products 5.19 4.65 4 0 4
Metals and mining 5.70 5.74 4 1 3
Semiconductors and semiconductor equipment 5.24 5.29 4 0 4
Communications equipment 5.61 5.47 3 1 2
Electrical equipment 6.25 6.32 3 0 3
Household products 9.57 7.58 3 0 3
Insurance 6.92 7.11 3 0 3
Personal products 7.62 9.76 3 2 1
Professional services 7.33 4.73 3 0 3
Air freight and logistics 4.55 6.65 2 1 1
Capital markets 6.90 6.88 2 0 2
Technology hardware, storage, and peripherals 6.34 5.42 2 0 2
Automobiles 3.59 1.58 1 0 1
Beverages 5.99 6.42 1 0 1
Construction materials 7.34 6.34 1 0 1
Distributors 6.02 6.22 1 0 1
Energy equipment and services 6.29 6.29 1 1 0
Equity real estate Investment trusts (REITs) 3.99 3.99 1 0 1
Health care technology 10.26 10.63 1 0 1
Healthcare equipment and supplies 9.28 11.26 1 0 1
Independent power and renewable electricity producers 4.20 4.20 1 0 1
Internet and direct marketing retail 5.57 3.76 1 0 1
Multiline retail 7.34 7.01 1 0 1
Paper and forest products 4.98 4.48 1 0 1
Pharmaceuticals 6.91 6.90 1 1 0
Project finance: oil and gas 6.18 6.88 1 0 1
Real estate management and development 6.30 5.09 1 0 1
Road and rail 7.94 11.04 1 0 1
(i)Review between July 1, 2020, and Nov. 18, 2020. GICS--Global Industry Classification Standard.

CLO Insights 2020 Index: Average Loan Prices Approach Early March Levels After Vaccine Announcements

Corporate loan prices increased dramatically a few weeks ago following positive news on COVID-19 vaccine development (see "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). The industries that rallied the most following the news were, unsurprisingly, consumer-facing industries that were most negatively affected by the pandemic, including hotels, restaurants, and leisure, entertainment, and airlines. The average price of loans in CLO portfolios in 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 decline slightly for many CLOs as managers sell loans from distressed issuers below par.

Table 5

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. SPWARF--S&P weighted average rating factor.

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 industry, 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 above and the Appendix below).

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 industries.

Table 6

Floating-Rate CLO Assets With Derived S&P Global Ratings' Credit And Recovery Ratings
GICS industry Issuer count (no.) Exposure (%) SPWARF WARR WAS WAP % on CreditWatch negative % negative outlook
Software 110 9.18 3209 58.69 3.88 97.36 0.00 13.76
Health care providers and services 82 6.31 3114 59.64 3.71 94.69 3.51 31.95
Media 54 5.82 2486 71.04 3.06 93.89 0.00 45.41
Hotels, restaurants, and leisure 77 5.51 3174 69.02 3.27 91.43 7.70 77.08
Diversified telecommunication services 34 5.12 2341 66.04 3.08 96.58 0.34 24.19
IT services 57 4.61 3474 61.02 3.77 93.38 7.88 36.21
Insurance 25 3.90 2660 54.07 3.47 97.67 0.00 14.28
Chemicals 54 3.62 2677 63.89 3.49 96.71 6.15 46.68
Commercial services and supplies 56 3.40 2962 61.51 3.64 95.38 0.70 44.89
Machinery 48 3.19 3114 57.71 3.69 96.41 6.35 31.31
Specialty retail 34 2.62 3414 60.51 3.83 92.49 0.26 46.93
Entertainment 26 2.50 3468 60.52 3.02 88.38 6.09 60.88
Containers and packaging 27 2.50 2543 59.00 3.12 96.61 0.00 22.53
Trading companies and distributors 37 2.41 2704 60.49 3.40 95.92 1.54 40.40
Capital markets 38 2.33 2308 54.63 3.32 96.63 0.00 22.56
Aerospace and defense 21 1.83 2689 51.57 3.30 92.98 1.53 77.49
Food products 31 1.80 2455 63.20 3.03 97.44 0.00 11.15
Oil, gas, and consumable fuels 31 1.73 2678 63.69 3.79 88.02 0.00 46.53
Pharmaceuticals 14 1.71 2668 72.21 3.36 95.48 5.62 49.72
Health care technology 17 1.70 2779 64.66 3.85 97.91 0.24 15.06
Professional services 31 1.69 2963 59.01 4.02 95.16 4.73 33.23
Building products 20 1.59 2053 55.35 3.45 97.83 0.00 77.08
Diversified consumer services 24 1.55 3327 61.51 3.53 95.31 1.99 60.97
Electronic equipment, instruments, and components 20 1.51 2387 63.37 3.20 96.13 0.00 40.53
Project finance: power 22 1.27 1865 70.71 4.33 94.97 0.00 13.26
Auto components 24 1.27 3452 55.58 3.89 93.40 19.21 54.61
Airlines 8 1.15 2921 79.06 2.83 83.57 0.00 98.49
Life sciences tools and services 14 1.07 2678 57.78 3.54 98.59 0.00 5.27
Real estate management and development 11 1.05 2268 69.53 2.84 95.53 0.00 35.42
Health care equipment and supplies 18 0.97 3670 57.28 4.24 93.26 16.16 23.27
Construction and engineering 20 0.94 3053 51.00 4.04 93.87 0.00 36.49
Communications equipment 13 0.94 2909 60.46 3.82 93.49 0.00 67.46
Personal products 14 0.88 3961 59.30 3.80 89.13 0.00 21.44
Metals and mining 14 0.83 2764 60.20 3.46 95.27 0.00 24.15
Electrical equipment 11 0.81 2658 54.41 3.40 95.16 0.00 16.02
Electric utilities 8 0.81 1689 72.84 3.53 95.96 0.00 38.51
Road and rail 11 0.80 2819 62.76 3.60 96.12 14.60 24.77
Independent power and renewable electricity producers 9 0.79 1765 88.59 2.87 97.97 0.00 7.69
Interactive media and services 12 0.73 2904 61.60 3.91 97.61 4.83 19.07
Household durables 16 0.67 2887 61.39 4.15 93.08 0.00 92.52
Technology hardware, storage, and peripherals 10 0.66 2553 62.78 3.54 95.49 0.00 33.02
Food and staples retailing 12 0.64 2290 61.73 3.81 96.94 0.00 41.23
Wireless telecommunication services 4 0.52 1494 81.09 3.27 98.28 0.00 34.08
Semiconductors and semiconductor equipment 11 0.49 2478 58.53 2.64 88.85 0.00 29.35
Construction materials 5 0.46 2096 52.52 2.74 94.28 0.00 22.31
Air freight and logistics 10 0.43 2372 66.59 3.58 96.04 0.00 22.80
Leisure products 11 0.42 2685 56.67 3.73 95.26 0.00 52.01
Distributors 7 0.41 3630 55.07 4.43 91.95 15.99 41.14
Biotechnology 4 0.36 1952 66.60 2.93 98.60 0.00 8.48
Internet and direct marketing retail 5 0.34 3507 51.53 3.92 90.16 0.00 80.34
Textiles, apparel, and luxury goods 16 0.34 3721 55.07 4.93 85.08 0.00 64.03
Gas utilities 1 0.27 2860 70.00 3.50 97.84 0.00 0.00
Energy equipment and services 8 0.25 7152 62.81 4.12 73.59 0.00 29.32
Automobiles 2 0.20 1565 48.88 3.20 98.38 0.00 100.00
Household products 6 0.17 4431 60.15 3.80 91.58 0.00 93.08
Transportation infrastructure 2 0.15 2216 78.56 3.97 97.79 0.00 0.00
Thrifts and mortgage finance 5 0.15 3310 68.37 4.09 96.81 0.00 40.69
Equity real estate investment trusts (REITs) 4 0.14 1755 80.74 2.00 94.75 0.00 91.97
Project finance: oil and gas 3 0.13 1608 87.86 4.06 95.12 0.00 32.84
Water utilities 1 0.11 3610 60.00 5.75 82.86 0.00 100.00
Beverages 3 0.08 4181 57.90 3.91 91.83 0.00 64.67
Paper and forest products 4 0.08 2369 77.94 4.69 97.65 0.00 0.00
Multiline retail 2 0.05 5233 59.54 6.73 42.44 0.00 100.00
Consumer finance 1 0.05 3610 45.00 5.25 87.19 0.00 100.00
Marine 2 0.03 4641 75.00 5.15 67.15 0.00 100.00
Tobacco 1 0.00 1982 95.00 3.25 94.00 0.00 100.00
GICS--Global Industry Classification Standard.
Ratings bias per GICS industry

At the end of the third quarter, 40.4% of the floating S&P Global Ratings-rated CLO assets had a negative rating bias, down from 43.5% in the second quarter. We also examined the breakdown between negative bias, positive bias, and stable for the top 30 GICS industries, each weighted by dollar exposure (see chart). The bias breakdown per GICS industry can be sensitive to the rating bias of the issuers with higher CLO exposures, particularly the GICS industries with less obligors.

image

Appendix

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 third-quarter 2020 trustee reports of reinvesting U.S. CLOs of BSLs.

S&P Global Ratings' corporate group issues and maintains credit ratings for most 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 most of loans held in CLOs.

Almost all companies that issue loans held in U.S. CLOs are classified within 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 third-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 S&P Global Ratings credit and recovery ratings. These floating S&P Global Ratings-rated CLO assets were issued by over 1,300 corporate issuers operating across various GICS industries and represent over 95% of the total par of the CLOs aggregated in this 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 nonperforming rating: 'CC', 'SD', and 'D', each with a rating factor of 10,000), then summing the total for the portfolio and dividing the 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;
daniel.hu@spglobal.com
Ramki Muthukrishnan, New York (1) 212-438-1384;
ramki.muthukrishnan@spglobal.com
U.S. Leveraged Loan Sector Lead:Robert E Schulz, CFA, New York (1) 212-438-7808;
robert.schulz@spglobal.com
U.S. CLO Sector Lead:Stephen A Anderberg, New York (1) 212-438-8991;
stephen.anderberg@spglobal.com
U.S. CLO Analytical Manager:Jimmy N Kobylinski, New York (1) 212-438-6314;
jimmy.kobylinski@spglobal.com

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