U.S. corporate rating actions continued to trend negative in November, but U.S. broadly syndicated loan (BSL) collateralized loan obligation (CLO) collateral credit metrics mostly held stable during the month. Coming out of the pandemic-driven downturn in 2020, CLO collateral credit quality had been on an improving trend for a year-and-a-half, but this slowed and then halted earlier this year amidst gathering economic headwinds. Most collateral metrics are now back to where they were at the start of 2022, or moderately worse off. Some notable metrics as of Dec. 1 include:

• BSL CLO exposure to loans from obligors with ratings in the 'CCC' range was 4.95%, almost exactly where it was back in January (4.94%).
• Non-performing assets were at 0.34%, versus 0.17% back in January.
• Corporate obligors in CLO collateral pools with a negative rating bias--that is, the sum of assets from obligors with ratings on CreditWatch negative and ratings with a negative outlook--has crept up to 14.94%, up from 13.21% back in January. We view negative ratings bias as an important forward-looking indicator of corporate credit quality.

Table 1

Corporate Rating Actions In November

As noted in our corporate rating actions tracker (see "U.S. BSL CLO Obligors: Corporate Rating Actions Tracker 2022," published Dec. 6, 2022), the past four consecutive months have seen corporate rating downgrades outnumber upgrades by about 2:1, a reversal of the positive trend in the first half of the year (see below for a list of selected corporate rating downgrades in November). During October and November, no 'CCC' rated U.S. BSL CLO obligors were upgraded out of the 'CCC' range, while a few were downgraded into the 'CCC' category over the same period. Despite this, CLO 'CCC' buckets averaged across the BSL CLO Index declined slightly by the end of November, partially due to manager intervention.

Table 2

Trades So Far In 2022 Have Pushed Out The Maturity Wall For Loans

CLO managers have traded fewer assets in their collateral pools this year than they had last year at this point (28% year-to-date 2022 vs. 47% last year at this point), probably reflecting the lower level of CLO collateral churn from loan refinancings and new issuance. We plan to take a deeper dive into this next month when we have full-year 2022 data, but in the meantime, one thing worth noting is the maturity wall for loans within CLOs, which has been pushed out considerably this year by CLO manager trading activity (see chart 1). While the overall speculative-grade corporate debt maturity wall remains manageable for now (see slide 12 in "U.S. BSL CLO And Leveraged Finance Quarterly: Is Winter Coming?" published Nov. 4, 2022), the ladder of upcoming debt maturities is a key area of focus when assessing the potential for future asset defaults.

Looking at manager trades in BSL CLO collateral pools year to date, the weighted average maturity of the assets removed are roughly 2.5 years less than the assets added in 2022, helping to push out the maturity wall of CLO portfolios. By December, assets maturing before 2025 had declined to 6.5% from 12% at the start of the year. While this may be good news from a collateral default outlook perspective, it has extended the life of the CLO transactions themselves. Given the low rate of corporate issuance/refinances and the lengthening maturity wall of CLO portfolios, this may translate into slower-than-historical senior CLO tranche pay downs across the amortizing CLOs.

Chart 1

Vintage Effect Across The Index In Focus Again

Back at the start of March 2020, as the credit impact from the pandemic began to be felt, the average 'CCC' exposure and junior overcollateralization (O/C) cushion values across the CLO Index stood at 4.13% and 3.76%, respectively. Looking across the current index this year, we note that as of the start of March 2022, as economic headwinds increased, the average 'CCC' exposure and junior O/C cushion values across the current CLO Index stood at somewhat similar values of 4.26% and 4.4%, respectively. The vintage effect was notable for both these time periods in March. Back in 2020, the pre-energy CLOs (CLOs that closed before 2016) within the Index had already gone through the energy slowdown and had higher 'CCC' buckets and lower O/C cushions relative to the post-energy transactions (CLOs that closed in or after 2016).

Currently, the vintage effect may be even more notable due to the impact the 2020 pandemic had on pre-pandemic CLOs (CLOs that closed before 2020). Today, the difference between the 'CCC' buckets and junior O/C cushions between the pre- and post-pandemic CLOs are greater than that of the deals pre- and post-energy slowdown in 2016. During the pandemic, three fourths of the pre-energy cohort of reinvesting CLOs experienced one or more CLO tranche downgrades, while one third of the post-energy cohort of reinvesting CLOs experienced one or more CLO tranche downgrades.

Table 3