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CLO Spotlight: Thirty Years Strong: U.S. CLO Tranche Defaults From 1994 Through First-Quarter 2024

(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 S&P Global Ratings rated its first collateralized loan obligation (CLO) transaction 30 years ago in 1994, we have rated more than 18,000 U.S. CLO tranches, totaling nearly $1.4 trillion in issuance (including CLO refinancing and reset activity). To date, through 30 years and several recessions (including the pandemic-related downturn in 2020), these CLO ratings have shown only a modest number of defaults, and they have outperformed almost any other rated asset type.

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 paid down in 2021, 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. For example, a 2006 vintage CLO might have had 26% par subordination for its 'AAA' tranche, but many CLO 2.0 transactions in recent years have had 35% or more par subordination for their 'AAA' tranches, although some CLOs with higher-than-average quality collateral pools may have less.
  • Collateral pools that exclude investments in assets other than corporate loans and a small portion of corporate bonds. Most CLO 1.0 transactions had the ability to invest up to 10% of their assets in tranches from other CLOs.
  • Transaction documents that incorporate lessons learned from the GFC. For example, CLO 2.0 indentures include provisions intended to prevent or mitigate CLO note cancellation and limit 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 2023, S&P Global Ratings rated 14,204 classes from more than 1,750 U.S. CLO 2.0 transactions totaling over $1.07 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 CLO 1.0 and 2.0 tranche 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 3,840 0 1,753
AA (sf) 616 1 0 3,112 0 1,498
A (sf) 790 5 0 2,582 0 1,290
BBB (sf) 783 9 0 2,355 0 1,273
BB (sf) 565 22 0 1,919 9 1,043
B (sf) 28 3 0 396 11 182
Total 4,322 40 0 14,204 20 7,039
(i)Original rating counts as of Dec. 31, 2023. (ii)CLO tranche default counts as of April 1, 2024. Source: S&P Global Ratings Credit Research & Insights and S&P Global Market Intelligence's CreditPro®.

In addition to these 60 defaulting CLO 1.0 and 2.0 tranches, we also have eight tranches from eight CLO 2.0 transactions that we view as likely candidates for future default based on the current rating assigned (see table 2). These 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
Avery Point IV CLO Ltd. F 2014 B- (sf) CC (sf)
BNPP IP CLO 2014-II Ltd. E 2014 BB (sf) CC (sf)
MidOcean Credit CLO III F-R 2014 B- (sf) CCC (sf)
Nassau 2017-I Ltd. D 2017 BB- (sf) CCC (sf)
Telos CLO 2014-5 Ltd. E-R 2014 BB- (sf) CCC (sf)
Telos CLO 2014-6 Ltd. E 2014 BB (sf) CCC- (sf)
Tralee CLO II, Ltd. F-R 2013 B- (sf) CCC- (sf)
Venture XXI CLO Ltd. F 2015 B (sf) CCC (sf)
CLO--Collateralized loan obligation.

Since the asset class emerged 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-April 1, 2024)
Transaction Tranche Year originated Original rating Year rating lowered to 'D' Cause
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.
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.
GE Commercial Loan Trust Series 2006-1 PTC 2006 BB (sf) 2010 Market value provisions.
Landmark II CDO Ltd.(i) B 2002 AA (sf) 2010 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.
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.
Confidentially rated tranche (CLO 3) N/A 2000 B (sf) 2011 Collateral deterioration.
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.
Landmark II CDO Ltd. C 2002 BBB (sf) 2011 Collateral deterioration.
Landmark II CDO Ltd. D 2002 BB (sf) 2011 Collateral deterioration.
Sandelman Finance 2006-1 Ltd. E 2006 BB (sf) 2011 Investor action.
Confidentially rated tranche (CLO 4) N/A 2001 BB (sf) 2012 Missed interest/non-deferrable.
Rosedale CLO II Ltd. E 2007 BB (sf) 2012 Investor action.
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.
Katonah V Ltd. D 2003 BB (sf) 2013 Collateral deterioration.
Longhorn CDO III Ltd. E 2003 BB (sf) 2013 Collateral deterioration.
Foxe Basin CLO 2003 Ltd. D 2003 BB (sf) 2014 Collateral deterioration.
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.
Premium Loan Trust I Ltd. C 2004 BBB (sf) 2014 Collateral deterioration.
Premium Loan Trust I Ltd. D 2004 BB (sf) 2014 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.
Airlie CLO 2006-II Ltd. D 2006 BB (sf) 2017 Collateral deterioration.
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.
Blue Ridge CLO Ltd. I D 2014 BB (sf) 2021 Collateral deterioration.
Blue Ridge CLO Ltd. I E 2014 B (sf) 2021 Collateral deterioration.
Flagship VII Ltd. F 2014 B (sf) 2021 Collateral deterioration.
Mountain Hawk II CLO Ltd. E 2013 BB (sf) 2021 Collateral deterioration.
WhiteHorse VII, Ltd. B-3L 2013 B (sf) 2021 Missed interest/non-deferrable.
B&M CLO 2014-1 Ltd. E 2014 B (sf) 2022 Collateral deterioration.
Blue Ridge CLO Ltd. II E 2014 B (sf) 2022 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.
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.
Catamaran CLO 2014-2 Ltd. E 2014 B (sf) 2023 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.
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.
Staniford Street CLO Ltd. E 2014 BB (sf) 2023 Collateral deterioration.
Marathon CLO VII Ltd. D 2014 BB (sf) 2024 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
Jon Palmer, CFA, Austin 212 438 1989;
jon.palmer@spglobal.com

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