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SF Credit Brief: CLO Insights U.S. BSL Index: A Look Back At CLO Bond Exposures; August Downgrades Weigh On CLO Metrics

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SF Credit Brief: CLO Insights U.S. BSL Index: A Look Back At CLO Bond Exposures; August Downgrades Weigh On CLO Metrics

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Since our last update (see "CLO Insights U.S. BSL Index: Slight Pickup In Some Junior O/C Cushions; Middle-Market CLO Manager Overlap By EBITDA," published Sept. 3, 2024, a handful of widely held issuers have experienced downgrades into the 'CCC' category or to a the nonperforming rating ('CC', 'SD', or 'D'), resulting in a modest deterioration in certain collateralized loan obligation (CLO) metrics (see "U.S. BSL CLO Obligors: Corporate Rating Actions Tracker 2024 (As Of Sept. 13)," published Sept. 20, 2024). Some loans from widely-held loan issuer Lumen Technologies are being held within broadly syndicated loan (BSL) CLO current-pay buckets in September trustee reports following a distressed exchange, particularly the senior loans, while other positions may be held as default assets. The average junior BSL CLO overcollateralization (O/C) test cushion has held steady at around 4% since May 2024, but may experience a slight decline in the near future due to recent corporate rating downgrades (see table 2).

Table 1

CLO BSL Index metrics (CLO Insights 2023-2024 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, 2023(i) 28.59 6.66 0.46 2742 59.47 0.63 17.39 96.04 4.61 100.08 6.28
Oct. 31, 2023(i) 27.12 7.55 0.51 2757 59.53 0.94 17.77 95.27 4.56 100.03 5.76
Nov. 30, 2023(i) 26.71 7.22 0.40 2730 59.40 1.00 18.19 95.87 4.48 99.98 5.92
Dec. 31, 2023(i) 26.26 7.14 0.51 2719 59.74 0.93 17.94 96.79 4.45 99.95 5.61
Jan. 31, 2024(i) 26.11 6.50 0.92 2723 59.58 0.35 18.00 96.74 4.36 99.86 5.08
Feb. 29, 2024(i) 26.43 6.09 1.01 2723 59.57 0.53 16.66 97.24 4.23 99.78 5.15
March 31, 2024(i) 26.20 6.92 0.77 2724 59.29 0.66 16.21 97.41 4.18 99.74 5.04
April 30, 2024(i) 25.77 6.51 1.02 2733 59.00 0.93 15.99 97.08 4.10 99.67 4.81
May 31, 2024(i) 25.53 6.70 0.51 2696 59.31 0.95 15.69 97.21 99.57 4.93
June 30, 2024(ii) 25.40 6.37 0.41 2677 59.10 1.16 15.11 96.94 4.02 99.52 4.59
July 31, 2024(ii) 25.30 6.44 0.33 2666 59.05 0.98 15.20 97.03 4.02 99.46 4.40
Aug. 30, 2024(ii) 25.27 6.44 0.59 2684 58.70 1.15 14.89 97.02 3.97 99.40 3.94
Sept. 23, 2024(iii) 25.13 6.73 0.72 2700 58.43 1.24 15.09 97.02 3.96 99.39 3.88
(i)Index metrics based on end-of-month ratings and pricing data and as-of month portfolio data available. (ii)Iindex metrics based on Aug. 30, 2024, ratings and pricing data and latest portfolio data available to us. (iii)Index metrics based on Sept. 23, 2024, 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 downgrades across top 500 U.S. BSL CLO obligors
Rating
Action date Issuer name GIC To From Rank within U.S. BSL CLOs
Aug. 16, 2024 Gainwell Acquisition Corp. Health care technology CCC+/Negative B-/Negative Top 250
Aug. 19, 2024 Redstone Buyer LLC IT services CCC+/Stable B-/Negative 251-500
Aug. 26, 2024 Magenta Buyer LLC Software SD/-- CCC/Negative Top 250
Sept. 4, 2024 Level 3 Financing INC. Diversified telecommunication services CC/Negative CCC+/Stable Top 250
Sept. 4, 2024 Lumen Technologies Inc. Diversified telecommunication services CC/Negative CCC+/Stable Top 250
Sept. 5, 2024 Cobham ltra Seniorco S.A.R.L. Aerospace and defense B-/Watch Neg B-/Negative 251-500
Sept. 16, 2024 Pretium PKG Holdings Inc. Containers and packaging SD/-- CCC+/Stable 251-500
Sept. 20, 2024 Naked Juice LLC Beverages CCC+/Negative B-/Stable Top 250
GIC--Global industry classification. BSL CLO--Broadly syndicated loan collateralized loan obligation.

End Of An Era? Looking Back At Bonds U.S. BSL CLOs

Since interest rates started to climb in early 2022, some CLO managers have increasingly rotated a small portion of their portfolios into fixed-rate assets. Most U.S. BSL CLOs limit exposure to fixed rate assets to a modest amount, often 5%; and at the start of 2022, most collateral pools had no fixed-rate assets, and the average exposure across our rated transactions was near zero. Rising rates, however, shifted the calculus, and by the third quarter of 2024, fixed-rate assets made up 2% of overall U.S. BSL CLO assets.

The appeal of this to CLO managers in a rising rate environment is pretty straightforward. It enabled them to simultaneously build par while also potentially improving the rating profile of the portfolio, since many corporate bond issuers are rated higher than the average corporate loan issuer. Bonds from higher-rated issuers typically have lower coupons and will trade at a greater discount to par in a high-rate environment.

Most of the newly acquired bonds came from speculative-grade issuers, but about 18% of the current fixed-rate assets in our BSL CLOs are from investment-grade issuers. Given the influx of fixed-rate assets from higher-rated issuers, the weighted average coupon of fixed-rate assets in U.S. BSL CLO portfolios have declined to about 4.5%, from about 5.5% from early 2022, while par and credit quality of the acquiring CLOs has improved.

Chart 1

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On Sept. 18, 2024, the Federal Reserve lowered interest rates by 50 basis points for the first time in four years. On the first few days that followed, there has been a very slight uptick in the average price of bonds that are held in US BSL CLO portfolios. Across the transactions we rate, we notice the larger managers were more likely to have larger exposure to fixed-rate assets in their portfolios; larger managers had about 2.2% exposure, while medium managers had about 1.7% and smaller managers had 1.5%.

Chart 2

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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
Vijesh MV, Pune;
Vijesh.MV@spglobal.com
Secondary Contact:Deegant R Pandya, New York + 1 (212) 438 1289;
deegant.pandya@spglobal.com
Data Contributor:Ben Woodcock, London + 44 20 7176 3789;
ben.woodcock@spglobal.com

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