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SF Credit Brief: CLO Insights 2023 U.S. BSL Index: Credit Metrics Slightly Weaker In February; Another Look At 'B-' Companies In CLOs

(Editor's Note: This report is S&P Global Ratings' monthly summary update of U.S. BSL CLO Index's credit metrics and notable credit themes.)


Downgrades across obligors in U.S. broadly syndicated loan (BSL) collateralized loan obligation (CLO) collateral pools continued to outnumber upgrades in February, and they increased noticeably during the month. Credit metrics across U.S. BSL CLOs were mixed in February: the average CLO exposure to 'B-' issuers inched up to 30.5%, while 'CCC' buckets declined slightly as some issuers saw their ratings lowered to a non-performing rating (i.e., below 'CCC-'). Average junior overcollateralization (O/C) cushions experienced a very small decline as some CLOs saw O/C test haircuts due to increased exposure to defaulted assets, and some CLOs sold assets at a significant discount to par (including Diamond Sports and Excela). Overall exposure to issuers with ratings that are on CreditWatch with negative implications or have a negative outlook both ticked up, while 'B-' assets from companies with ratings with a negative outlook broke above 4%.

Table 1

CLO BSL Index Metrics (CLO Insights 2022-2023 U.S. BSL Index)(i)
BSL 'B-' (%) 'CCC' category (%) Nonperforming assets (%) SPWARF WARR (%) Watch Neg (%) Negative outlook (%) Weighted avg. price of portfolio ($) Jr. O/C cushion (%) % of target par 'B-' on negative outlook (%)
Jan. 2022 26.41 4.94 0.17 2700.00 60.44 0.88 12.33 98.79 4.37 99.68 2.00
Feb. 2022 27.16 4.27 0.37 2708.00 60.43 0.28 11.94 98.83 4.41 99.68 1.92
March 2022 27.09 4.26 0.39 2708.00 60.41 0.11 11.35 98.02 4.40 99.68 1.66
April 2022 27.44 4.17 0.13 2690.00 60.45 1.06 10.86 97.88 4.31 99.69 1.59
May 2022 27.76 4.26 0.14 2700.00 60.45 1.20 9.83 97.57 4.30 99.70 1.41
June 2022 27.70 4.14 0.20 2706.00 60.48 1.27 10.46 94.60 4.39 99.71 1.43
July 2022 28.59 4.01 0.35 2720.00 60.27 1.35 11.08 92.19 4.45 99.74 1.80
Aug. 2022 28.70 4.00 0.34 2726.00 60.32 1.46 11.53 93.81 4.47 99.78 1.94
Sept. 2022 29.00 4.21 0.59 2754.00 60.24 1.03 12.20 94.85 4.50 99.81 2.08
Oct. 2022 28.85 4.40 0.50 2751.00 60.16 1.16 13.36 92.12 4.50 99.82 2.86
Nov. 2022 28.85 5.02 0.40 2754.00 60.13 0.59 14.46 92.40 4.47 99.84 3.31
Dec. 2022 29.50 4.95 0.34 2749.00 59.81 0.32 14.62 93.08 4.44 99.85 3.48
Jan. 2023 30.03 5.23 0.50 2764.00 60.20 0.14 15.18 92.88 4.45 99.85 3.84
Feb. 2023(i) 30.09 5.48 0.46 2766.00 60.26 0.22 15.76 94.40 4.39 99.86 3.94
March 2023(i) 30.52 5.14 0.71 2775.00 60.16 0.35 16.33 94.67 4.35 99.86 4.14
(i)A small handful of transactions have dropped off this index for the calculation of the Feb. 2023 and March 2023 metrics as they have exited the reinvestment period in 2023. 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.

Table 2

February Actions On Widely Held Issuers (Top 500)
Action date Issuer name GIC Current day Previous day Reason Rank
2/9/2023 Hexion Holdings Corp. Chemicals B-/Stable B/Negative Ratings withdrawn Top 250
2/16/2023 Diamond Sports Group LLC Media D/-- CCC-/Negative Missed interest payments Top 250
2/17/2023 Sabre GLBL Inc. Software B-/Stable B/Negative Prolonged air travel recovery and elevated leverage Top 250
2/18/2023 MED PARENTCO L.P. Health care providers and services CCC+/Negative B-/Stable Weaker-than-expected performance 251 to 500
2/25/2023 Bausch Health Cos. Inc. Pharmaceuticals SD/-- CCC+/Stable Below-par debt repurchases Top 250
2/28/2023 OT Merger Corp. Machinery CCC+/Negative B-/Negative Persistently weaker credit metrics 251 to 500

Not All 'B-' Exposures Are The Same

Over the past five years, U.S. BSL CLO exposure to assets from 'B-' rated issuers has increased substantially, to 30.5% today from less than 13% at the end of 2017 (see slide 24 in our most recent published BSL slide deck "SLIDES: U.S. BSL CLO And Leveraged Finance Quarterly: Navigating The Rough 'CCCs'," published Feb. 9, 2023). However, as we note in our slide deck, not all 'B-' companies are the same. Historically (especially before 2017), most 'B-' companies in CLOs were issuers that got to 'B-' by way of downgrade. That is, they started with a rating of 'B' (or higher), and then saw their rating lowered to 'B-'. This is different from the situation today, where a majority of 'B-' companies in CLO collateral pools were 'B-' from the start. Across the 30.5% of CLO collateral that comes from 'B-' issuers, roughly one third comes from issuers that have been downgraded to 'B-', while about two thirds are still at their original 'B-' rating. It may be that the latter cohort might see fewer downgrades during a downturn, although only time will tell.

Across the GICS industries we use in our CLO analysis, software companies make up the largest proportion of 'B-' exposures by a wide margin, followed by healthcare providers and services. We note a large majority of the 'B-' software exposures still remain at their original rating, while almost half of the 'B-' healthcare providers and services issuers got there via downgrade from a higher rating.

Chart 1


Another way to parse out CLO 'B-' exposures is by looking at loan prices. We find there is a wide range of prices across 'B-' exposures in CLO collateral pools, in particular across issuers that are still at their original 'B-' rating. Only about 2.2% of these loans are trading below 80, while 13.5% of the issuers that have been downgraded to 'B-' are trading below 80.

Table 3

Price Distribution Of U.S. BSL CLO 'B-' Exposures
Loan price as of March 2023 Issuers currently rated at original rating of 'B-' (%) Issuers currently not rated at original rating of 'B-' (%)
90+ 83.85 64.03
80-90 13.95 22.43
Below 80 2.20 13.54
Weighted average price 94.13 88.70
BSL CLO--Broadly syndicated loan collateralized loan obligation.

Finally, we looked at BSL CLO 'B-' exposures through another filter: issuer size, as measured by EBITDA. Specifically, reported EBITDA across the latest financial statements available to us (mostly third-quarter 2022). We found that over half of the 'B-' exposures across U.S. BSL CLOs have reported EBITDA of less than $200 million. The EBITDA of software and healthcare provider and services 'B-' rated issuers tend to have lower EBITDA, in stark contrast to some of the much larger 'B-' rated airline and retail issuers. We see in chart 2 below that CLOs with lower 'B-' exposure within their portfolios tend to have more exposure to 'B-' issuers with higher EBITDA (that is, larger companies), while CLOs with higher 'B-' exposures tend to have more exposure to the 'B-' issuers with lower EBITDA (smaller companies). Pre-pandemic U.S. BSL CLOs, on average, have slightly less 'B-' exposures (29.9%) relative to that of post-pandemic U.S. BSL CLOs (31.2%), though we find the average median EBITDA of 'B-' exposures across the pre-pandemic portfolios are slightly higher than that of the post-pandemic portfolios ($165 million vs. $161 million, respectively). In addition, we find a slightly higher proportion of the 'B-' exposures across pre-pandemic portfolios are trading at distressed prices relative to post-pandemic portfolios.

Chart 2


This report does not constitute a rating action.

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

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