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.
|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.|
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.
|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)|
|Health care providers and services||1.71||11.39|
|Hotels, restaurants, and leisure||2.36||23.41|
|Diversified telecommunication services||2.29||0.79|
|Commercial services and supplies||8.72||8.18|
|Containers and packaging||5.32||5.84|
|Trading companies and distributors||2.45||5.25|
|Aerospace and defense||3.22||3.30|
|Oil, gas, and consumable fuels||13.93||18.89|
|Health care technology||2.29||4.01|
|Diversified consumer services||0.06||26.38|
|Electronic equipment, instruments, and components||0.10||5.22|
|Project finance: power||2.83||3.63|
|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.
|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|
|(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).
|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|
|Hotels, restaurants, and leisure||7.50||8.73||20||5||15|
|Commercial services and supplies||6.08||5.91||16||4||12|
|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|
|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|
|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|
|Metals and mining||5.70||5.74||4||1||3|
|Semiconductors and semiconductor equipment||5.24||5.29||4||0||4|
|Air freight and logistics||4.55||6.65||2||1||1|
|Technology hardware, storage, and peripherals||6.34||5.42||2||0||2|
|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|
|Paper and forest products||4.98||4.48||1||0||1|
|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.
|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|
|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.
|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|
|Health care providers and services||82||6.31||3114||59.64||3.71||94.69||3.51||31.95|
|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|
|Commercial services and supplies||56||3.40||2962||61.51||3.64||95.38||0.70||44.89|
|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|
|Aerospace and defense||21||1.83||2689||51.57||3.30||92.98||1.53||77.49|
|Oil, gas, and consumable fuels||31||1.73||2678||63.69||3.79||88.02||0.00||46.53|
|Health care technology||17||1.70||2779||64.66||3.85||97.91||0.24||15.06|
|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|
|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|
|Metals and mining||14||0.83||2764||60.20||3.46||95.27||0.00||24.15|
|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|
|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|
|Air freight and logistics||10||0.43||2372||66.59||3.58||96.04||0.00||22.80|
|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|
|Energy equipment and services||8||0.25||7152||62.81||4.12||73.59||0.00||29.32|
|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|
|Paper and forest products||4||0.08||2369||77.94||4.69||97.65||0.00||0.00|
|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.
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;|
|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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