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SF Credit Brief: CLO Insights 2023 U.S. BSL Index: Corporate Downgrades Continue To Outpace Upgrades; Defaults Start To Accumulate


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SF Credit Brief: CLO Insights 2023 U.S. BSL Index: Corporate Downgrades Continue To Outpace Upgrades; Defaults Start To Accumulate

(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.)


Among obligors in U.S. broadly syndicated loan (BSL) collateralized loan obligation (CLO) collateral pools, corporate rating downgrades have outpaced upgrades for 12 straight months since May of last year. Over this past year, over 90 obligors (mostly rated 'B-') have seen their ratings lowered into the 'CCC' category, while about 100 issuers have been downgraded to 'B-' from 'B' and above (for the list of 2023 rating actions affecting U.S. BSL CLO obligors, see "U.S. BSL CLO Obligors: Corporate Rating Actions Tracker 2023 (As Of May 19)," published May 23, 2023). The average BSL CLO 'CCC' bucket has increased to just over 6%, while, for the first time since early 2021, S&P Global Ratings' weighted average rating factor (SPWARF) values have increased to just over 2800 (see table 1 below).

In April and May 2023 so far, there have been a flurry of corporate defaults (see table 2 below), resulting in a notable uptick in defaulted assets held within BSL CLO portfolios, which now sits at 1.00%--still modest by historical standards, but the highest level since early 2021. With most CLOs haircutting the carrying value of defaulted assets to the lower of rating agency recovery assumption or market value for purposes of calculating the CLO's overcollateralization (O/C) ratio test, O/C test cushions across the index have already started to decline since the start of the year. In particular, loans from a few widely held issuers with very low market values have resulted in notable O/C test haircuts across CLO transactions with exposure.

For now, there seems to be a slight reprieve in some of the more forward-looking metrics: 'B-' exposures overall have declined for the first time in several months, while the proportion of CLO assets with ratings with a negative outlook has also declined slightly for the first time in several months.

Table 1

CLO BSL Index metrics (CLO Insights 2022-2023 U.S. BSL Index)
As of date 'B-' (%) 'CCC' category (%) Nonperforming assets (%) SPWARF WARR (%) Watch negative (%) Negative outlook (%) Weighted avg. price of portfolio ($) Jr. O/C cushion (%) % of target par B-' on negative outlook (%)
April 1, 2022 27.66 3.87 0.11 2692 60.17 0.92 10.04 97.77 4.67 99.77 1.35
May 1, 2022 28.18 3.74 0.12 2696 60.20 1.06 9.40 97.59 4.78 99.79 1.22
Jun. 1, 2022 28.06 3.72 0.17 2702 60.06 1.18 9.81 94.72 4.62 99.82 1.21
Jul. 1, 2022 28.88 3.69 0.30 2718 59.88 1.26 10.41 92.21 4.68 99.84 1.54
Aug. 1, 2022 29.09 3.68 0.28 2724 59.88 1.37 11.07 93.75 4.72 99.89 1.84
Sep. 1, 2022 29.49 3.74 0.53 2746 59.83 0.96 11.65 94.72 4.66 99.91 1.92
Oct. 1, 2022 29.29 3.90 0.48 2743 59.93 1.04 12.82 92.00 4.62 99.90 2.69
Nov. 1, 2022 29.29 4.58 0.35 2746 59.89 0.52 13.88 92.37 4.63 99.93 3.17
Dec. 1, 2022 30.22 4.61 0.29 2744 59.96 0.32 14.06 93.03 4.60 99.93 3.52
Jan. 1, 2023 30.23 5.05 0.45 2758 59.97 0.12 14.81 92.77 4.60 99.94 3.75
Feb. 1, 2023 30.30 5.24 0.42 2760 60.09 0.15 15.26 94.66 4.49 99.94 3.88
Mar. 1, 2023 30.69 4.86 0.66 2766 59.93 0.22 16.05 94.56 4.41 99.91 4.10
Apr. 1, 2023 30.79 5.06 0.64 2764 59.63 0.31 16.50 93.86 4.32 99.90 4.24
May 1, 2023(i) 30.86 5.76 0.70 2780 60.20 0.46 17.14 94.19 4.28 99.91 5.39
May 25, 2023(ii) 30.15 6.04 1.00 2807 60.18 0.62 16.16 93.60 4.26 99.88 4.99
(i)Index metrics based on ratings and pricing data and latest portfolio data available to us as of May 1, 2023. (ii)Index metrics based on ratings and pricing data and latest portfolio data available to us as of May 24, 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

Downgrades into nonperforming across U.S. BSL CLO obligors
Action date Issuer name GIC Current Previous Rank within U.S. BSL CLOs
4/2/2023 Akorn Operating Co. LLC Pharmaceuticals D/-- CCC+/Stable 1,251 to 1,500
4/6/2023 Covis Finco S.a.r.l. Health care providers and services SD/-- CCC+/Stable 1,251 to 1,500
4/6/2023 Lannett Co. Inc. Pharmaceuticals SD/-- CCC+/Negative 1,500+
4/6/2023 Rodan & Fields LLC Personal products D/NM CCC-/Negative 1,001 to 1,250
4/11/2023 QualTek LLC Construction and engineering SD/NM CCC+/Negative 1,251 to 1,500
4/28/2023 LifeScan Global Corp. Health care equipment and supplies CC/Negative CCC+/Watch Neg 501 to 750
4/27/2023 Checkers Holdings Inc. Hotels, restaurants, and leisure D CCC-/Negative 1,251 to 1,500
5/11/2023 ROBERTSHAW US HOLDING CORP. Electronic equipment, instruments and components SD CCC/Negative 1,001 to 1250
5/16/2023 Telesat Canada Diversified telecommunication services SD CCC+/Negative 251 to 500
5/16/2023 AmSurg LLC Health care providers and services D CCC/Negative Top 250
5/16/2023 Envision Healthcare Corp. Health care providers and services D CCC/Negative Top 250
5/16/2023 Monitronics International Inc. Commercial services and supplies D CCC/Negative 1,251 to 1,500
5/17/2023 CareerBuilder LLC Professional services SD CCC/Negative 1,251 to 1,500
5/18/2023 At Home Group Inc. Specialty retail SD CCC+/Negative 751 to 1,000
5/18/2023 Venator Materials PLC Chemicals D CCC/Negative 1,001 to 1,250
5/19/2023 Shutterfly LLC Specialty retail CC/Watch Neg CCC/Negative 501 to 750
GIC--Global industry classification. BSL CLO--Broadly syndicated loan collateralized loan obligation. D--Default. SD--Selective default.

Rising Bond Exposures, Spreads, And Interest Coverage (I/C) Test Cushions

Investors we've spoken with have different views on CLO managers adding bonds to their portfolios, but with interest rates rising sharply over the past year, some managers have taken advantage of depressed bond prices to help build par. Today, about 60% of total U.S. BSL CLO transactions hold one or more bonds in their portfolio, and fixed-rate assets as a proportion of total U.S. BSL CLO assets is about 1.3%, up from near zero at the start of 2022.

Over the same period, the weighted average coupon of fixed rate securities held in BSL CLO collateral pools has declined as some managers took the opportunity to trade into bonds from highly rated issuers that offered lower coupons on their debt, which likely moderated potential deterioration in SPWARF scores.

Chart 1


Meanwhile, spreads on new issue loans added to CLO collateral pools over the past year have modestly increased CLO weighted average spread (WAS) levels (see chart 2).

Chart 2


This has helped to stabilize CLO I/C test cushions across reinvesting U.S. BSL CLOs (see chart 3).

Chart 3


U.S. BSL CLO Weighted Average Maturities Decline

Limited refinance and new issuance activity in both the corporate loan and CLO markets is having an impact on CLO collateral pools. By the end of this year, about 37% of S&P Global Ratings-rated U.S. BSL CLOs will be outside of their reinvestment period. Meanwhile, the weighted average life (WAL) of assets held within U.S. BSL CLOs has declined to recent lows (see chart 4).

Chart 4


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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