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CLO Spotlight: U.S. CLO Tranche Defaults As Of July 27, 2023

(Editor's Note: We intend to update this article periodically as the tally of U.S. CLO ratings assigned a 'D' changes due to additional CLO tranches defaulting. Table 3 contains a list of S&P Global Ratings-rated CLO tranches that have defaulted.)

Since the mid-'90s, S&P Global Ratings has rated more than 17,000 U.S. collateralized loan obligation (CLO) tranches, totaling a cumulative total of around $1.3 trillion (including CLO refinancing and reset activity). To date, through almost 30 years and several recessions (including the pandemic related downturn in 2020), these ratings have shown only a modest number of defaults. The CLO 1.0 generation of transactions--those rated from the inception of the market in the mid-1990s through 2009--comprised 4,322 tranches from around 800 cash flow CLOs rated by S&P Global Ratings. The last of these transactions have now paid down, and their default history is complete: Of the 4,322 ratings, just 40 defaulted, 15 of which began life with an investment-grade rating ('BBB- (sf)' or higher) when originally issued (see table 1).

The CLO 2.0 generation of transactions began in 2010 with the reemergence of CLO transaction new issuance in the aftermath of the Global Financial Crisis (GFC). There were a number of differences between the first-generation CLO 1.0 transactions and the post-GFC CLO 2.0 transactions, including:

  • More credit enhancement for the rated CLO notes, especially at the top of the CLO capital structure;
  • Collateral pools that excluded investments in assets other than corporate loans and some small portion of corporate bonds;
  • Transaction documents that incorporated lessons learned from the GFC, including provisions that prevented or mitigated CLO note cancellation and limited the manager's ability to extend the life of the CLO transaction via trades done after the end of the reinvestment period.

Additionally, the investor base for the 2.0 transactions was (and is) less levered and less sensitive to changes in market value of the tranches than the CLO 1.0 universe had been.

From 2010 through second-quarter 2023, S&P Global Ratings rated 13,489 classes from more than 1,600 U.S. CLO 2.0 transactions totaling over $1.0 trillion (including refinancing and reset activity). While there was a downturn in the energy and commodities sectors in 2015 and 2016, the CLO 2.0 generation of transactions hadn't seen a full-blown recession until the 2020 pandemic-related downturn, and a modest number of CLO 2.0 tranches have now defaulted (see table 1; the full list of 59 defaults is in table 3).

Table 1

U.S. CLO 1.0 and 2.0 default summary by original rating
CLO 1.0 CLO 2.0
Number of original ratings(i) Number of defaults(ii) Number currently rated Number of original ratings(i) Number of defaults(ii) Number currently rated
AAA (sf) 1,540 0 0 3,639 0 1,626
AA (sf) 616 1 0 2,964 0 1,398
A (sf) 790 5 0 2,449 0 1,198
BBB (sf) 783 9 0 2,230 0 1,184
BB (sf) 565 22 0 1,818 8 975
B (sf) 28 3 0 389 11 187
Total 4,322 40 0 13,489 19 6,568
(i)Original rating counts as of June 30, 2022. (ii)CLO tranche default counts as of July 27, 2023. Source: S&P Global Ratings Credit Research & Insights and S&P Global Market Intelligence's CreditPro®.

In addition to these defaulting CLO 1.0 and 2.0 tranches, we also have four tranches from four CLO 2.0 transactions that we view as likely candidates for future default based on the current rating assigned (see table 2). These four tranches are currently rated 'CC (sf)', indicating our view that a default is a near certainty, or 'CCC- (sf)', which we view as vulnerable to nonpayment. The CLOs from which these tranches come from are earlier vintage 2.0s that experienced both the energy and commodity downturn in 2015-2016 and the pandemic-related downturn in 2020. While these tranches haven't yet defaulted, they have experienced downgrades to their current ratings due to significant credit deterioration, and the current ratings assigned reflect our view that it is unlikely the notes will get repaid in full by the CLOs' legal final maturity dates. While the notes are undercollateralized (the balance of CLO notes at their level and senior exceeds the balance of the CLO's performing assets, excluding equity), they are deferrable and it may be some time before a payment default occurs (typically when the CLO hits its final maturity date, or the assets are liquidated and the proceeds are insufficient to pay off the CLO notes in full).

Table 2

Likely future defaults: U.S. CLO tranches currently rated 'CCC-' or 'CC'
Rating
Transaction Tranche Year originated Original Current
BNPP IP CLO 2014-II Ltd. E 2014 BB (sf) CC (sf)
Avery Point IV CLO Ltd. F 2014 B- (sf) CC (sf)
Marathon CLO VII Ltd. D 2014 BB- (sf) CCC- (sf)
Telos CLO 2014-6 Ltd. E 2014 BB (sf) CCC- (sf)
CLO--Collateralized loan obligation.

Since the asset class emerged almost 30 years ago, CLOs have shown resilient performance through multiple economic downturns. The reasons for this go back to basic CLO structural mechanics and protective mechanisms. First and foremost is the CLO structure itself, with the equity tranche sitting at the bottom of the capital stack, first in line to absorb any losses ahead of the rated CLO notes. Further, in times of stress, the mechanics of the CLO structure work to protect the senior CLO notes, and no CLO note originally rated 'AAA (sf)' has defaulted.

Table 3

U.S. CLO tranches rated by S&P Global Ratings with ratings lowered to 'D' (1994-July 27, 2023)
Transaction Tranche Year originated Original rating Year rating lowered to 'D' Cause
Confidentially rated tranche (CLO 1) N/A 1999 BB- (sf) 2013 Collateral deterioration.
Confidentially rated tranche (CLO 1) N/A 1999 BB- (sf) 2013 Collateral deterioration.
Confidentially rated tranche (CLO 1) N/A 1999 BB- (sf) 2013 Collateral deterioration.
Confidentially rated tranche (CLO 2) N/A 1999 B+ (sf) 2011 Collateral deterioration.
Confidentially rated tranche (CLO 2) N/A 1999 B+ (sf) 2011 Collateral deterioration.
KBC - Orion Commercial Loan Master Trust D-1 1999 BB (sf) 2002 Collateral deterioration.
KBC - Orion Commercial Loan Master Trust D-2 1999 BB (sf) 2002 Collateral deterioration.
Confidentially rated tranche (CLO 3) N/A 2000 B (sf) 2011 Collateral deterioration.
Confidentially rated tranche (CLO 4) N/A 2001 BB (sf) 2012 Missed interest/non-deferrable.
Highland Loan Funding V Ltd. C-1 2001 BBB (sf) 2014 Collateral deterioration.
Highland Loan Funding V Ltd. C-2 2001 BBB (sf) 2014 Collateral deterioration.
Highland Loan Funding V Ltd. D 2001 BB+ (sf) 2014 Collateral deterioration.
Landmark II CDO Ltd.(i) B 2002 AA (sf) 2010 Missed interest/non-deferrable.
Landmark II CDO Ltd. C 2002 BBB (sf) 2011 Collateral deterioration.
Landmark II CDO Ltd. D 2002 BB (sf) 2011 Collateral deterioration.
Stanfield Carrera CLO Ltd. C-1 2002 BBB (sf) 2014 Missed interest/non-deferrable.
Stanfield Carrera CLO Ltd. C-2 2002 BBB (sf) 2014 Missed interest/non-deferrable.
Stanfield Carrera CLO Ltd. D-1 2002 BB (sf) 2014 Collateral deterioration.
Stanfield Carrera CLO Ltd. D-2 2002 BB (sf) 2014 Collateral deterioration.
Foxe Basin CLO 2003 Ltd. D 2003 BB (sf) 2014 Collateral deterioration.
Katonah V Ltd. D 2003 BB (sf) 2013 Collateral deterioration.
Longhorn CDO III Ltd. E 2003 BB (sf) 2013 Collateral deterioration.
Premium Loan Trust I Ltd. C 2004 BBB (sf) 2014 Collateral deterioration.
Premium Loan Trust I Ltd. D 2004 BB (sf) 2014 Collateral deterioration.
Airlie CLO 2006-II Ltd. D 2006 BB (sf) 2017 Collateral deterioration.
GE Commercial Loan Trust Series 2006-1 PTC 2006 BB (sf) 2010 Market value provisions.
GE Commercial Loan Trust Series 2006-2 D 2006 BBB- (sf) 2011 Market value provisions.
GE Commercial Loan Trust Series 2006-2 PT 2006 BB (sf) 2011 Market value provisions.
GE Commercial Loan Trust Series 2006-3 C 2006 A (sf) 2011 Market value provisions.
GE Commercial Loan Trust Series 2006-3 D 2006 BBB- (sf) 2011 Market value provisions.
GE Commercial Loan Trust Series 2006-3 PTC 2006 BB (sf) 2011 Market value provisions.
Global Leveraged Capital Credit Opportunity Fund I E-1 2006 BB (sf) 2019 Collateral deterioration.
Global Leveraged Capital Credit Opportunity Fund I E-2 2006 BB (sf) 2019 Collateral deterioration.
Sandelman Finance 2006-1 Ltd. E 2006 BB (sf) 2011 Investor action.
Rosedale CLO II Ltd. E 2007 BB (sf) 2012 Investor action.
Kingfisher Capital CLO Ltd. A 2008 BBB+ (sf) 2009 Missed interest/non-deferrable.
Pine CCS Ltd. A-1 2008 A- (sf) 2009 Missed interest/non-deferrable.
Pine CCS Ltd. A-2 2008 A- (sf) 2009 Missed interest/non-deferrable.
Spruce CCS Ltd. Senior notes 2008 A (sf) 2010 Missed interest/non-deferrable.
Verano CCS Ltd. Senior notes 2008 A- (sf) 2010 Missed interest/non-deferrable.
Mountain Hawk II CLO Ltd. E 2013 BB (sf) 2021 Collateral deterioration.
Flagship VII Ltd. F 2014 B (sf) 2021 Collateral deterioration.
WhiteHorse VII, Ltd. B-3L 2013 B (sf) 2021 Missed interest/non-deferrable.
Blue Ridge CLO Ltd. I D 2014 BB (sf) 2021 Collateral deterioration.
Blue Ridge CLO Ltd. I E 2014 B (sf) 2021 Collateral deterioration.
BNPP IP CLO 2014-1 Ltd. D 2014 BB (sf) 2022 Collateral deterioration.
BNPP IP CLO 2014-1 Ltd. E 2014 B (sf) 2022 Collateral deterioration.
Blue Ridge CLO Ltd. II E 2014 B (sf) 2022 Collateral deterioration.
GLG Ore Hill CLO 2013-1, Ltd. F 2013 B (sf) 2022 Collateral deterioration.
OFSI Fund VI, Ltd. E 2014 B (sf) 2022 Collateral deterioration/investor action.
B&M CLO 2014-1 Ltd. E 2014 B (sf) 2022 Collateral deterioration.
Halcyon Loan Advisors Funding 2012-1 Ltd. D 2012 BB (sf) 2023 Collateral deterioration.
Halcyon Loan Advisors Funding 2013-1 Ltd. D 2013 BB (sf) 2023 Collateral deterioration.
Hull Street CLO Ltd. E 2014 BB (sf) 2023 Collateral deterioration.
Hull Street CLO Ltd. F 2014 B (sf) 2023 Collateral deterioration.
Staniford Street CLO Ltd. E 2014 BB (sf) 2023 Collateral deterioration.
Mountain View CLO 2014-1 Ltd. E 2014 BB- (sf) 2023 Collateral deterioration.
Mountain View CLO 2014-1 Ltd. F 2014 B- (sf) 2023 Collateral deterioration.
Catamaran CLO 2014-2 Ltd. E 2014 B (sf) 2023 Collateral deterioration.
(i)Landmark II CDO Ltd.'s class B note, a non-deferrable note originally rated 'AA', had its rating lowered to 'D' in 2010 after the trustee escrowed the note's interest payments after filing an interpleader action with the U.S. courts. The class B note did not suffer economic loss as its rating was raised to 'BB+ (sf)' from 'D' in 2011 after receiving all interest owed, as well as interest on interest. Class B paid off its full principal balance shortly after. CLO--Collateralized loan obligation. N/A--Not applicable. PTC--Preferred trust certificates. PT--Preferred trust. Source: S&P Global Ratings Research.

This report does not constitute a rating action.

Primary Credit Analysts:Stephen A Anderberg, New York + (212) 438-8991;
stephen.anderberg@spglobal.com
Daniel Hu, FRM, New York + 1 (212) 438 2206;
daniel.hu@spglobal.com
Evan M Gunter, Montgomery + 1 (212) 438 6412;
evan.gunter@spglobal.com

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