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SF Credit Brief: CLO Insights 2021 MM Index: Middle Market CLO Issuance Continues While Credit Estimate Defaults Fall


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SF Credit Brief: CLO Insights 2021 MM Index: Middle Market CLO Issuance Continues While Credit Estimate Defaults Fall

Chart 1


No news is good news, right? Credit metrics for middle market (MM) CLO portfolios within our middle market CLO Index continue to remain stable, with only modest changes during the month of May. Exposure to issuers with non-performing ratings or credit estimates continues to decline (see below), while par balances of MM portfolio remain stable. According to S&P Leveraged Commentary & Data, eight new issue middle market CLOs have closed in year-to-date 2021 through May, while 11 MM CLOs have experienced either a refinancing (three) or a reset (eight).

Table 1

Credit Metrics
Loans from 'B-' obligors (%) Loans from 'CCC' obligors (%) Loans from non-performing obligors (%) SPWARF Jr. O/C cushion (%) Par Credit estimated (%)
Start 66.05 23.34 0.87 3926 5.24 0.00 73.65
2/1/2021 65.78 23.96 0.80 3942 5.46 (0.03) 72.79
3/1/2021 64.86 25.14 0.69 3956 5.55 0.00 72.13
4/1/2021 64.57 25.50 0.65 3968 5.66 0.04 71.60
5/1/2021 65.84 24.71 0.66 3964 5.79 0.08 71.58
6/1/2021 66.88 23.99 0.59 3954 5.99 0.19 72.27
SPWARF--S&P Global Ratings weighted average rating factor. O/C--Overcollateralization.

Significantly Less Defaults Have Been Recorded Within Credit Estimated Issuers So Far In 2021

With the COVID-19 pandemic-related lockdowns in the first half of 2020, many MM companies were hit hard, and the preservation of liquidity became a key focus. Instances of liquidity preservation efforts we observed included deferral of interest payments on loans; swapping a portion of the cash interest due for payments in kind; pushing back scheduled amortization and rolling them into the final bullet payment for the loan; and extending maturity dates. Some of these measures resulted in investors getting less than the promise of original securities without adequate and offsetting compensation, in our view, and hence constituted a selective default, leading us to lower the credit estimate score to an 'sd' before subsequently refreshing our score based on the revised terms of payment. The number of MM loan selective defaults significantly outnumbered the number of payment defaults, as seen in the chart below.

Chart 2


After gradually declining for the past several years to a relatively low 1.0% at the start of 2020, the one-year lagging non-performing (i.e., default) rate for credit estimates increased to about 9.0% by November 2020, largely due to the aforementioned selective defaults. This is expected to drop further as this trailing 12 months default tally will soon exclude April, May, and June of 2020, all of which saw high levels of selective defaults. Many of these issuers have since been assigned a performing credit estimate and dropped out of the default tally. If we exclude selective defaults and focus on conventional defaults only, the one-year lagging default rate in our sample of outstanding estimates increased to about 2.5% in July and has declined since.

This report does not constitute a rating action.

Primary Contact:Daniel Hu, FRM, New York + 1 (212) 438 2206;
Stephen A Anderberg, New York + (212) 438-8991;
Ramki Muthukrishnan, New York + 1 (212) 438 1384;
Secondary Contact:Deegant R Pandya, New York + 1 (212) 438 1289;

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