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SF Credit Brief: CLO Insights 2023 U.S. BSL Index: CLO ‘CCC’ Exposures Up; Scenario Analysis On 'BB' O/C Test Cushions

(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.)


Since August 2023, a small handful of widely held collateralized loan obligation (CLO) obligors have experienced a downgrade to 'B-' or into the 'CCC' category (see table 2). U.S. CLO metrics followed suit, with average 'B-' and 'CCC' range exposures increasing marginally in September. Meanwhile, average junior overcollateralization (O/C) cushions declined to just under 4.00% from an average of 4.75% a year ago, largely due to default haircuts, par loss, and excess 'CCC' asset haircuts from some transactions. Across our index of 554 rated reinvesting U.S. broadly syndicated loan (BSL) CLOs, 42% have 'CCC' category exposures exceeding the typical 7.5% threshold, while just over 1% are failing their junior O/C test. Roughly another 1% of transactions are passing their junior O/C test with less than 50 basis points (bps) of cushion.

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 (%)
Sept. 30, 2022(i) 29.45 3.73 0.44 2741 59.88 0.91 12.70 92.06 4.75 100.01 2.67
Oct. 31, 2022(i) 29.41 4.41 0.32 2744 59.84 0.41 13.74 92.45 4.76 100.04 3.15
Nov. 30, 2022(i) 30.31 4.44 0.27 2741 59.90 0.32 13.88 93.11 4.75 100.05 3.49
Dec. 31, 2022(i) 30.34 4.85 0.42 2754 59.92 0.12 14.57 92.85 4.76 100.06 3.73
Jan. 31, 2023(i) 30.44 5.05 0.40 2757 60.03 0.15 15.04 94.75 4.65 100.05 3.85
Feb. 28, 2023(i) 30.80 4.72 0.60 2762 59.86 0.22 15.87 94.64 4.57 100.03 4.07
March 31, 2023(i) 30.88 4.92 0.60 2760 59.68 0.32 16.28 93.95 4.48 100.03 4.19
April 30, 2023(i) 31.07 5.35 0.62 2768 59.56 0.32 16.80 94.22 4.40 100.00 5.37
May 31, 2023(i) 29.98 6.23 0.72 2786 59.39 0.52 16.12 93.33 4.26 99.91 4.71
June 30, 2023(i) 29.16 6.80 0.67 2777 59.42 0.47 15.96 94.84 4.12 99.85 4.78
July 31, 2023(i) 28.63 6.58 0.71 2766 59.31 0.33 16.63 95.33 4.03 99.80 5.41
Aug. 31, 2023(ii) 28.57 7.07 0.63 2768 59.29 0.33 17.33 95.75 3.97 99.77 5.85
Sept. 21, 2023(iii) 28.67 7.11 0.63 2770 59.21 0.41 17.47 95.89 3.97 99.77 6.04
(i)Index metrics based on end-of-month ratings and pricing data and as of month portfolio data available. (ii)Index metrics based on Aug. 31, 2023, ratings and pricing data and latest portfolio data available to us. (iii)Index metrics based on Sept. 21, 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.

Table 2

Notable U.S. BSL CLO obligor downgrades
Action date Issuer name GIC Current Previous Rank within U.S. BSL CLOs
Aug. 10, 2023 Rackspace Technology Global Inc. IT services SD CCC+/Negative Top 250
Aug. 17, 2023 Level 3 Financing Inc. Diversified telecommunication services CCC+/Negative B/Negative Top 250
Aug. 17, 2023 Lumen Technologies Inc. Diversified telecommunication services CCC+/Negative B/Negative Top 250
Aug. 24, 2023 Sound Inpatient Physicians Inc. Health care providers and services CCC/Negative B-/Negative 251 to 500
Aug. 31, 2023 PLZ Corp. Chemicals B-/Stable B/Stable 251 to 500
Sept. 11, 2023 EP Purchaser LLC Entertainment B-/Watch Neg B/Stable 251 to 500
Sept. 11, 2023 Forest City Enterprises L.P. Real estate management and development B-/Negative B/Negative Top 250
Sept. 14, 2023 Woof Holdings Inc. Food products CCC+/Negative B-/Stable 251 to 500
Sept. 21, 2023 Staples Inc. Specialty retail B-/Negative B/Stable Top 250
Sept. 23, 2023 LHS Borrower LLC Diversified consumer services B-/Stable B/Stable 251 to 500
GIC--Global industry classification. BSL CLO--Broadly syndicated loan collateralized loan obligation. D--Default. SD--Selective default.

Scenario Analysis Shows Impact To 'BB' O/C Cushions If More 'B-' Issuers See Downgrades

Earlier this year, we published a study on the potential impact to CLO O/C test cushions under various CLO asset downgrade and price decline scenarios, which affect the O/C test calculation when a CLO exceeds its 7.5% 'CCC' asset threshold (see "Scenario Analysis: How Rising U.S. BSL CLO 'CCC' Baskets Could Affect Junior Overcollateralization Test Cushions," published April 28, 2023). We found that most 'BB' tranche O/C test cushions were able to withstand 'CCC' baskets increasing into the mid-teens or higher before failing, although there were significant differences between amortizing and reinvesting CLO transactions.

Since then, BSL CLO 'CCC' buckets have increased to about 7% from about 5% (see table 1 above), while the average junior O/C test cushions have declined to 3.97% from about 4.48%. On a modest positive note, exposure to assets from 'B-' obligors has declined slightly since then, though exposure to 'B-' rated obligors with a negative rating outlook has increased steadily.

Using the same framework as in our prior study, we explore the potential impact to 'BB' tranche O/C cushions of different combinations of 'B-' obligor downgrades along with a 5% decline in trading price:

  • Scenario one: Loans trading below 80 from 'B-' companies see a downgrade to the 'CCC' range and a 5% decline in price.
  • Scenario two: Loans trading below 90 from 'B-' companies see a downgrade to the 'CCC' range and a 5% decline in price.
  • Scenario three: All companies rated 'B-' with a negative outlook see a downgrade into the 'CCC' range and a 5% decline in price.

We find the impact to reinvesting CLO transactions is fairly muted relative to the amortizing transactions. Currently, 'BB' O/C test cushions for reinvesting CLOs are almost 3% higher on average than for the older amortizing CLO transactions. As we increase the stress levels of our scenarios through increased 'B-' downgrades, we see the average 'BB' O/C test cushion of our amortizing cohort falling below 0% if we assume all exposure to 'B-' with a negative outlook experiences a downgrade with a 5% decline in loan price, resulting in just over half of these amortizing transactions failing. Meanwhile, reinvesting transactions still have well over 2.5% cushion under this scenario, with less than 10% of transactions failing.

Chart 1


Chart 2


2023 Vintage New Issue CLO Portfolios

Relative to the overall U.S. BSL CLO exposures, the 2023 vintage transactions that have closed year to date have:

  • Less exposure to 'B-' ('B' is the largest exposure, relative to 'B-' for overall exposures);
  • Less exposure to software, healthcare providers and services, and diversified telecommunication services; and
  • More exposure to hotels, restaurants, and leisure.

Chart 3


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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