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SF Credit Brief: CLO Insights 2022 U.S. BSL Index: Downgrades Across U.S. BSL CLO Obligors Reach Highest Level Since 2020; Most CLO Credit Metrics Edge (Slightly) Negative

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SF Credit Brief: U.S. CMBS Delinquency Rate Increased 3 Bps To 2.5% In September

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Weekly European CLO Update

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Student Loan Forgiveness Expected To Have Minimal Impact On ABS Ratings

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U.S. Credit Card Quality Index: Monthly Performance--August 2022


SF Credit Brief: CLO Insights 2022 U.S. BSL Index: Downgrades Across U.S. BSL CLO Obligors Reach Highest Level Since 2020; Most CLO Credit Metrics Edge (Slightly) Negative

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Over 30 August Downgrades Cause 'CCC' Buckets And Nonperforming Assets To Increase

A spate of corporate rating downgrades in August, including on some widely held obligors in U.S. broadly syndicated loan (BSL) collateral loan obligation (CLO) transactions, had an impact on CLO credit metrics during the month. After having gradually decreased from nearly 5% at the start of 2022 to a low of 4.0% on Aug. 1, the average BSL CLO 'CCC' asset basket crept up to 4.21%. Nonperforming assets increased to 0.59% from 0.34% last month as the result of several widely held obligors defaulting. Assets from 'B-' rated companies continued to increase, hitting an all-time high of 29.0%. Other metrics were mixed.

Table 1

CLO BSL Index Metrics (CLO Insights 2022 U.S. BSL Index)
As of date 'B-' (%) 'CCC' category (%) Nonperforming category (%) SPWARF WARR (%) Watch negative (%) Negative outlook (%) Weighted avg. price of portfolio ($) Jr. O/C cushion (%) % of target par Turnover (%) SOFR exposure (%)(i)
Jan. 2022 26.41 4.94 0.17 2700 60.44 0.88 12.33 98.79 4.37 99.68 0.00 1.14
Feb. 2022 27.16 4.27 0.37 2708 60.43 0.28 11.94 98.83 4.41 99.68 5.68 2.77
March 2022 27.09 4.26 0.39 2708 60.41 0.11 11.35 98.02 4.40 99.68 8.15 6.64
April 2022 27.44 4.17 0.13 2690 60.45 1.06 10.86 97.88 4.31 99.69 11.35 9.53
May. 2022 27.76 4.26 0.14 2700 60.45 1.20 9.83 97.57 4.30 99.70 14.46 11.55
June 2022 27.70 4.14 0.20 2706 60.48 1.27 10.46 94.60 4.39 99.71 16.66 12.47
July 2022 28.59 4.01 0.35 2720 60.27 1.35 11.08 92.19 4.45 99.74 19.55 16.34
Aug. 2022 28.70 4.00 0.34 2726 60.32 1.46 11.53 93.81 4.47 99.78 21.86 18.45
Sept. 2022 29.00 4.21 0.59 2754 60.24 1.03 12.20 94.85 4.50 99.81 23.61 19.64
(i)Based off trustee reports dated within one month prior to being available to us at the start of each month. This index includes only 2021 vintage and prior transactions that have closed with CLO liabilities indexed to LIBOR (excludes 2022 vintage CLOs that would be indexed to SOFR). BSL CLO--Broadly syndicated loan collateralized loan obligation. SPWARF--S&P Global Ratings' weighted average rating factor. WARR--Weighted average recovery rate. O/C--Overcollateralization. SOFR--Secured overnight financing rate.

The count of downgrades across U.S. BSL CLO obligors increased to more than 30 in August (see chart 1), the highest monthly count of downgrades since the pandemic (July 2020), leading to a downgrade-to-upgrade ratio of 2.3 across U.S. BSL CLO obligors, also a recent high (since Sept. 2020). Across U.S. BSL CLO obligors in August 2022:

  • Three issuers saw their ratings lowered to 'B' or higher;
  • 10 issuers saw their ratings lowered to 'B-';
  • Nine issuers saw their ratings lowered into the 'CCC' category;
  • Five issuers saw their ratings lowered within the 'CCC' category; and
  • Six issuers saw their ratings lowered to default (three conventional default and three selective default).

Chart 1

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The following table is a list of notable rating actions on some top 250 U.S. BSL CLO obligors.

Table 2

Notable Rating Actions Across Top 250 U.S. BSL CLO Obligors
Entity Rank Rationale
Bausch Health Cos. Inc. 19

Bausch Health Cos. Inc. Downgraded To 'CC' Upon Announcement Of Distressed Exchange; Outlook Negative, Aug. 31, 2022

Artera Services LLC 172

Artera Services LLC Downgraded To 'CCC+' From 'B-' On Elevated Leverage; Outlook Stable, Aug. 24, 2022

Endo International PLC 197

Endo International PLC Downgraded To 'D' From 'CC' Following Chapter 11 Bankruptcy Filing, Aug. 17, 2022

EyeCare Partners LLC 215

EyeCare Partners LLC Downgraded To 'B-' From 'B' On Weaker Cash Flow, Outlook Stable; New Debt Rated, Aug. 16, 2022

Avaya Holdings 225

Avaya Holdings Downgraded To 'CCC-' After It Issues Going Concern Warning And Hires Debt Advisors, Outlook Negative, Aug. 11, 2022

Recap Of Actions And Exposures To CLO Obligors Since Beginning Of 2022

Loan prices rose in August after inflecting in mid-July (see chart 2), as seen within the weighted average values across the U.S. BSL CLO Index. However, not everything moved upward; many of the loans from issuers that were recently downgraded into the 'CCC' range or below missed out on the broader trend and didn't see any increase in August.

Chart 2

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Since the start of the year, about 120 U.S. BSL CLO obligors have seen their ratings lowered or placed on CreditWatch with negative implications. At the start of the year, these obligors that would eventually see a negative rating action represented about 6.7% of aggregate U.S. CLO exposures at the time. As reported within more recent third-quarter trustee reports, exposure to these obligors have declined to about 6.0%.

Across the issuers that have experienced negative rating actions in 2022, aggregate U.S. BSL CLO exposures:

  • Declined 0.17% across the issuers lowered into the 'CCC' category from 'B-' or higher;
  • Declined 0.15% across the issuers lowered below 'CCC-' from 'CCC-' and higher; and
  • Increased 0.34% across the issuers that have been downgraded to 'B-' or higher.

These trades likely helped to reduce the CLO 'CCC' and defaulted asset exposures across the index.

Loans from issuers that have been lowered to 'B-' since the start of 2022 have experienced a slight improvement in loan prices, rising about 1 point since mid-July, though they still trade lower than the average price of the broader market.

Another Junior CLO Tranche Defaults; A Few 'CCC' Rated CLO Tranches Placed On CreditWatch Negative

We lowered our rating to 'D (sf)' on a junior tranche from a 2014 vintage U.S. BSL CLO 2.0 earlier this month (see "Rating On B&M CLO 2014-1 Ltd. Class E Notes Lowered To 'D (sf)', And Class D-R Notes Rating Discontinued Upon Redemption," published Aug. 15, 2022). As noted within our study on U.S. CLO2.0 defaults, "The Dirty (Almost) Dozen: What Separates Defaulting U.S. CLO 2.0 Tranches From The Rest," published July 7, 2022), some 2014 vintage U.S. CLO 2.0s experienced notable deterioration as they reinvested through the energy slowdown in 2016 and amortized through the pandemic in 2020, making it difficult to optionally redeem the portfolio to pay off the junior tranches in full. All 11 U.S. CLO 2.0 notes that have defaulted so far are junior notes (originally rated speculative grade) from CLOs originally issued in 2013 and 2014 (for the full list of U.S. CLO defaults, see "U.S. CLO Defaults As Of Aug. 15, 2022," published Sept. 7, 2022).

In August, we placed our ratings on nine senior and mezzanine U.S. BSL CLO 2.0 notes on CreditWatch positive due to an increase in credit support following senior note paydowns, and we placed our ratings on five junior CLO notes on CreditWatch negative due to an increase in portfolio concentration (see "Ratings On 17 Classes From Seven U.S. CLOs And One U.S. CRE-CDO Placed On CreditWatch," published Aug. 16, 2022). All five U.S. BSL CLO 2.0 tranches placed on CreditWatch negative are currently rated within the 'CCC' category where they were last downgraded to during the pandemic in 2020. The currently depressed asset prices may make optionally redemption difficult, increasing the risk of further deterioration for junior CLO notes. Currently, there are 33 U.S. CLO tranches rated 'CCC+ (sf)' and below.

Table 3

Count Of U.S. CLO Ratings: 'CCC+ (sf)' And Below
Current rating (as of Sept. 1, 2022) Not On CreditWatch CreditWatch negative Total
CCC+ 21 3 24
CCC 3 2 5
CC 4 4
Total 28 5 33
CLO--Collateralized loan obligation.

This report does not constitute a rating action.

Primary Credit Analysts:Daniel Hu, FRM, New York + 1 (212) 438 2206;
daniel.hu@spglobal.com
Stephen A Anderberg, New York + (212) 438-8991;
stephen.anderberg@spglobal.com
Secondary Contact:Deegant R Pandya, New York + 1 (212) 438 1289;
deegant.pandya@spglobal.com

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