(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.
|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.|
|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.
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.
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;|
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.