(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) | ||||||
---|---|---|---|---|---|---|
Rating | ||||||
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; 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 |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.