(Editor's Note: 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 U.S. broadly syndicated loan (BSL) collateralized loan obligation (CLO) obligors picked up slightly in August, outnumbering upgrades for another month. Despite the downgrades, several CLO metrics improved slightly during the month, including S&P Global Ratings' weighted average rating factor (SPWARF) values across the index. These have now improved slightly over the past three months, partially driven by the gradual decline in CLO exposure to assets from 'B-' rated companies.
The average BSL CLO 'CCC' basket ticked up by late August, mainly driven by widely-held Lumen Technologies Inc. and Level 3 Financing Inc, whose ratings were both lowered to 'CCC+' from 'B' on Aug. 17, 2023. As of late August, over one-third of the CLOs in the index (which consists of 533 S&P Global Ratings-rated reinvesting U.S. BSL CLOs) are exceeding their 7.5% threshold for 'CCC' category issuers. Downgrades of corporate ratings into the 'CCC' range may result in overcollateralization (O/C) cushion volatility for some CLOs in the coming months, though the current average junior O/C test cushion, at just over 4% across the entire index, remains healthy by historical standards. The cushion is down from 4.8% one year ago.
Average loan prices in CLO collateral pools (modestly) improved for another month, improving to 95.5 from 95.3 in July, while exposure to loans from issuers with a nonperforming rating declined to 0.6% from 0.7% over the same period. On a less positive note, the proportion of CLO obligors with a rating on negative outlook continues to tick up slightly, and now stands at just over 17% of total collateral. Looking towards future CLO 'CCC' baskets, 5.9% of BSL CLO assets come from an obligor rated 'B-' with a negative outlook, which by definition will end up in the 'CCC' range (or lower) if they see a downgrade.
|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 (%)|
|Aug. 31, 2022(i)||29.66||3.57||0.49||2744||59.77||0.95||11.52||94.78||4.80||100.04||1.88|
|Sept. 30, 2022(i)||29.43||3.75||0.44||2741||59.87||1.02||12.70||92.06||4.76||100.04||2.66|
|Oct. 31, 2022(i)||29.39||4.44||0.32||2743||59.83||0.52||13.74||92.45||4.77||100.07||3.14|
|Nov. 30, 2022(i)||30.29||4.45||0.27||2741||59.90||0.32||13.89||93.11||4.76||100.07||3.50|
|Dec. 31, 2022(i)||30.31||4.88||0.42||2754||59.91||0.12||14.58||92.85||4.76||100.09||3.72|
|Jan. 31, 2023(i)||30.40||5.08||0.40||2757||60.02||0.16||15.05||94.75||4.66||100.08||3.84|
|Feb. 28, 2023(i)||30.77||4.73||0.61||2762||59.85||0.22||15.87||94.64||4.58||100.06||4.07|
|March 31, 2023(i)||30.85||4.92||0.60||2760||59.67||0.31||16.30||93.94||4.48||100.06||4.19|
|April 30, 2023(i)||31.04||5.36||0.63||2768||59.56||0.32||16.81||94.21||4.41||100.04||5.37|
|May 31, 2023(i)||29.94||6.25||0.73||2786||59.39||0.52||16.13||93.32||4.26||99.94||4.69|
|June 30, 2023(i)||29.13||6.81||0.67||2777||59.41||0.47||15.97||94.83||4.11||99.88||4.78|
|July 31, 2023(ii)||28.65||6.62||0.73||2768||59.28||0.33||16.66||95.33||4.03||99.83||5.43|
|Aug. 23, 2023(iii)||28.33||6.87||0.60||2757||59.27||0.28||17.04||95.50||4.01||99.82||5.90|
|(i)Index metrics based on end-of-month ratings and pricing data and as of month portfolio data available. (ii)Index metrics based on July 31, 2023, ratings and pricing data and latest portfolio data available to us. (iii)Index metrics based on Aug. 23, 2023, ratings and pricing data and latest portfolio data available to us. 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.|
|Notable U.S. BSL CLO obligor downgrades|
|Action date||Issuer name||GIC||Current||Previous||Rank within U.S. BSL CLOs|
|7/13/2023||Project Alpha Intermediate Holding Inc.||Software||B-/Stable||B/Watch Neg||251 to 500|
|7/18/2023||Tosca Services LLC||Containers and packaging||CCC+/Negative||B-/Negative||501 to 750|
|7/18/2023||Midwest Physician Adminstrative Services LLC||Health care providers and services||B-/Negative||B/Stable||501 to 750|
|7/21/2023||Anchor Glass Container Corp.||Containers and Packaging||SD||CCC/Negative||501 to 750|
|7/28/2023||U.S. Renal Care Inc.||Health care providers and services||D||CCC+/Stable||501 to 750|
|8/10/2023||Rackspace Technology Global Inc.||IT services||SD||CCC+/Negative||Top 250|
|8/15/2023||Cano Health Inc.||Health care providers and services||CCC-/Negative||B-/Negative||501 to 750|
|8/17/2023||Level 3 Financing Inc.||Diversified telecommunication services||CCC+/Negative||B/Negative||Top 250|
|8/17/2023||Lumen Technologies Inc.||Diversified telecommunication services||CCC+/Negative||B/Negative||Top 250|
|8/24/2023||Sound Inpatient Physicians Inc.||Health care providers and services||CCC/Negative||B-/Negative||251 to 500|
|8/25/2023||Olaplex Inc.||Personal products||B-/Negative||B+/Negative||501 to 750|
|GIC--Global industry classification. BSL CLO--Broadly syndicated loan collateralized loan obligation. D--Default. SD--Selective default.|
How Different Are U.S. And European CLOs?
Few instruments have demonstrated resilience and adaptability like CLOs, which have now faced several downturns such as the Global Financial Crisis of 2008-2009 and, more recently, the COVID-19 pandemic. Their resilience and attractiveness as a floating-rate instrument in today's rising rate environment has led to the European (EUR) and U.S. CLO investor bases broadening, as they continue to be a material source of funding for leveraged loans globally.
While the overarching principles of CLOs remain consistent across the U.S. and European markets, a closer look reveals some nuances that differentiate broadly syndicated loan (BSL) CLOs in the two regions. For our full study, see our slide deck "SLIDES: U.S. And European BSL CLOs: A Comparative Overview," published on Aug. 31, 2023, but we've excerpted some of the findings below:
- By early 2019, U.S. CLOs had higher exposures to loans from issuers rated 'CCC+' and below in 2019 (partly due to the energy and retail slowdown in 2016-2017).
- The average 'CCC' bucket rose to 12.5% in U.S. CLOs and 8.9% in European CLOs in 2020 at the height of the pandemic-driven downturn.
- The average 'CCC' bucket have come down significantly since then, but remains elevated (6.7% U.S. CLOs vs. 4.6% European CLOs) compared to pre-pandemic levels (4.5% U.S. CLOs vs. 2.6% EUR CLOs).
- U.S. CLOs have experienced an uptick in exposure to assets from 'CCC' range obligors since early 2023, while the average European CLO exposure to 'CCC' assets has declined modestly over the same period.
Just prior to the pandemic, the median European CLO 'BB' O/C test cushions was about 5%, vs. about 4% for U.S. CLOs. During the pandemic, U.S. CLOs saw a 2.4% decline in their 'BB' cushions between March and May 2020, compared to a decline of 0.4% for European CLOs during the same time.
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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