NEW YORK (S&P Global Ratings) June 2, 2021--S&P Global Ratings recently published a slide deck highlighting the key themes for the leveraged finance and collateralized loan obligation (CLO) sectors in the second quarter: "U.S. CLO And Leveraged Finance Quarterly Key Themes: Q2 2021."
Insights from the leveraged finance space include the following:
- The speculative-grade universe remains skewed to 'B-' as positive actions increase. Upgrades in speculative grade far exceeded downgrades in the first quarter of 2021. Still, risks inherent in lower ratings mix and high 'CCC' levels remain even as the economy recovers.
- Recovery speed varies across sectors. Some sectors may take multiple years to recover. Others are bright spots amid some signs of stability, with negative outlooks declining and positive outlooks rising.
- Supportive capital markets lead to higher debt, recaps, lower near-term maturities, and an influx of new issuers. New 'B-' issuers have returned in force.
- Our year-end 2021 loan default forecast has been lowered to 2.75%.
- Post-default issue-level recovery expectations are largely stable, although first-lien recovery expectations have been declining and event risk remains.
And here are the main themes regarding CLOs:
- U.S. broadly syndicated loan (BSL) CLO credit metrics continue to improve following positive momentum on the corporate ratings side, but still have a ways to go before getting back to pre-pandemic levels.
- A review of the loans in CLO 'CCC' baskets shows that a large majority come from obligors rated 'CCC+'; given the approach used by our Corporate Ratings team when assigning these ratings, this leads us to expect fewer defaults in CLO collateral pools in the near term than if more of these loans came from obligors rated 'CCC' or 'CCC-'.
- Significant numbers of CLO ratings have been placed on CreditWatch positive in recent weeks; so far, these positive rating actions have mostly been the result of post-reinvestment period CLOs paying down senior notes rather than improved collateral credit quality in the aftermath of the pandemic.
- The ratings composition of U.S. BSL CLO collateral pools has followed a trend over the past four years of increasing exposure to loans from obligors rated 'B-'; these now comprise about 25% of total collateral, compared to 20% before the pandemic and less than 13% at year-end 2017.
- Recovery ratings show a similar trend; loans with recovery ratings of 3(50%) and 3(55%) now comprise more than 37% of total U.S. BSL CLO collateral pools, compared to 30% pre-pandemic and 24% at year-end 2017.
- Despite the credit dislocation brought about by the pandemic, no CLO tranches defaulted in 2020; however, we currently have seven CLO tranches rated either 'CC' or in the 'CCC' range on CreditWatch negative, indicating these CLO tranche are likely candidates for future default. All were originally rated 'BB' or lower.
- Meanwhile, CLO issuance continues to be very robust; year-to-date through April, CLO new issues have totaled $52.15 billion (versus $91.76 billion for full-year 2020), and CLO resets and refinancings have totaled $94.97 billion (compared to just $33.46 billion for full-year 2020).
This report does not constitute a rating action.
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|Analytical Contacts:||Stephen A Anderberg, New York + (212) 438-8991;|
|Daniel Hu, FRM, New York + 1 (212) 438 2206;|
|Robert E Schulz, CFA, New York + 1 (212) 438 7808;|
|Steve H Wilkinson, CFA, New York + 1 (212) 438 5093;|
|Media Contact:||Jeff Sexton, New York + 1 (212) 438 3448;|
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