(Editor's Note: This article is part of a series in which we list companies with loans held in U.S. broadly syndicated CLO collateral pools that have experienced negative rating actions. We will update and republish the list of affected CLO obligors on a periodic basis.)
Key Takeaways
- Negative rating actions on corporate loan issuers are starting to accumulate within U.S. broadly syndicated loan collateralized loan obligation (BSL CLO) collateral pools, which have now seen more than 14% of their collateral downgraded or placed on CreditWatch negative since early March. As of March 29, 2020, 9.9% of U.S. BSL CLO loans came from an obligor with a rating on CreditWatch with negative implications, compared with 8.5% last week and 1.6% at the start of March.
- Since the beginning of March, 'CCC' buckets in U.S. BSL CLOs have more than doubled in size, to 8.4% as of March 29 from 4.1% at the start of the month. The increase in loans from 'CCC' rated obligors, combined with a significant drop in loan prices, will likely reduce the cushion for U.S. CLO junior overcollateralization (O/C) ratio tests as CLO trustee reports are issued in coming weeks.
- Most U.S. BSL CLOs have an allowable bucket of 7.5% for loans from 'CCC' rated obligors; above that amount, there is no forced sale of assets, but the excess 'CCC' loans above the 7.5% threshold are carried at market value rather than par value for purposes of calculating the CLO O/C ratio tests.
- The list of affected U.S. BSL CLO obligors and the list of U.S. CLO tranche ratings on CreditWatch negative as of March 29, 2020, can be downloaded here: http://www.standardandpoors.com/pt_LA/web/guest/article/-/view/sourceId/100042885.
As corporate ratings analysts in the U.S. continue to reassess the ratings assigned to speculative-grade companies, U.S. BSL CLOs are seeing an increase in collateral that has been affected by a negative rating action. As of March 29, 2020, over 200 obligors found within U.S. BSL CLOs have either had their ratings lowered or placed on CreditWatch negative, or both (see the first tab of the excel file at: http://www.standardandpoors.com/pt_LA/web/guest/article/-/view/sourceId/100042885). Since last week (March 22 through March 29), there have been negative rating actions on seven auto components issuers; six oil, gas, and consumable fuels issuers; and five specialty retail issuers. The hotel, restaurants, and leisure industry category (fourth-largest sector within reinvesting U.S. BSL CLOs with about 79 issuers) has experienced negative rating actions on about 55 issuers since early March.
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak around midyear, and we are using this assumption in assessing the economic and credit implications. In our view, the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
These negative rating actions on corporate loan issuers are beginning to accumulate within U.S. BSL CLO collateral pools, which have now seen more than 14% of their collateral downgraded or placed on CreditWatch negative. Since the beginning of March, 'CCC' buckets in U.S. BSL CLOs have more than doubled in size, to 8.4% as of March 29 from 4.1% at the start of the month; and as of March 29, 9.9% of U.S. BSL CLO loans came from an obligor with a rating on CreditWatch negative, compared with 8.5% last week and 1.6% at the start of March. Additionally, some of the issuers that had their ratings lowered in March continue to have a CreditWatch negative placement. About 10% of exposures across the CLO Insights 2020 Index are on CreditWatch negative, while over 20% have a negative rating outlook.
Table 1
| CLO Index Metrics (CLO Insights 2020 Index) | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| B- (%) | 'CCC' category (%) | Non-perform category (%) | Jr. O/C cushion (%) | Weighted avg. price of portfolio | SPWARF | Par change (%) | Watch negative | Negative outlook | ||||||||||||
| Jan. 1, 2020 | 19.97 | 4.11 | 0.54 | 3.86 | 97.45 | 2644 | 0.00 | 1.63 | 17.36 | |||||||||||
| Feb. 1, 2020 | 20.20 | 4.07 | 0.56 | 3.80 | 97.55 | 2645 | (0.04 | 1.33 | 17.66 | |||||||||||
| March 1, 2020 | 20.16 | 4.13 | 0.63 | 3.76 | 95.83 | 2639 | (0.07) | 1.61 | 17.18 | |||||||||||
| March 20, 2020 | 22.91 | 6.92 | 0.65 | 3.74 | 79.53 | 2753 | (0.09) | 8.47 | 18.85 | |||||||||||
| March 29, 2020 | 23.23 | 8.43 | 0.72 | 3.73 | 80.92 | 2807 | (0.09) | 9.89 | 20.86 | |||||||||||
| Note: CLO Insights 2020 Index is an index of 410 S&P Global Ratings rated U.S. BSL CLOs that will be reinvesting for all of 2020. BSL CLO--Broadly syndicated loan collateralized loan obligation. O/C--Overcollateralization. SPWARF--S&P Global Ratings weighted average rating factor. | ||||||||||||||||||||
Most U.S. BSL CLOs have an allowable bucket of 7.5% for loans from 'CCC' rated obligors; above that amount, there is no forced sale of assets, but the excess 'CCC' loans above the 7.5% threshold are carried at market value rather than par value for purposes of calculating the CLO O/C ratio tests. The increase in loans from 'CCC' rated obligors, combined with a significant drop in loan prices, will likely reduce the cushion for U.S. CLO junior O/C ratio tests as CLO trustee reports are issued in coming weeks. Given the trustee reports available to us as of March 30, 2020, average junior tranche O/C cushions have already declined to 3.73%.
In response to the shifting risk profile of the collateral pools, we have started to see CreditWatch negative placements on some U.S. CLO subordinate and lower mezzanine tranche ratings. As of March 30, 2020, 59 tranches across 39 S&P Global Ratings-rated U.S. BSL CLOs have ratings on CreditWatch negative, many of them from two rating actions taken amidst the economic dislocation of recent weeks as described in the articles below:
- "22 Ratings on 15 U.S. Reinvesting CLOs Exposed To Downgrades And Stressed Sectors Placed On CreditWatch Negative," published March 27, 2020; and
- "25 Ratings On 15 U.S. CLO Transactions With Larger Exposures To Energy-Related Sectors Placed On Watch Negative," published March 20, 2020.
The following excel file, which we will update periodically as circumstances warrant, is a list of affected U.S. BSL CLO obligors (first tab) and a list of U.S. CLO tranche ratings on CreditWatch negative as of March 29, 2020 (second tab):
http://www.standardandpoors.com/pt_LA/web/guest/article/-/view/sourceId/100042885
Related Research
- Global Macroeconomic Update, March 24: A Massive Hit To World Economic Growth March 24, 2020
- Leveraged Finance: Issuer Spotlight: Top-250 CLO Obligors (Various Ratings Actions Taken In Gaming Sectors), March 23, 2020
- American Airlines Group And Subsidiary Downgraded To 'B' On Steeply Lower Demand Due To Coronavirus; Remain On Watch Neg, March 20, 2020
- Global IT Spending Set To Slide As Coronavirus Hits Hardware Sales," March 19, 2020
- Coronavirus Will Put U.S. CLO Diversity And Managers To The Test, March 13, 2020.
- Sector Averages Of Reinvesting U.S. BSL CLO Assets: Credit Quality Deteriorated In Fourth-Quarter 2019 As Loan Prices And Spreads Increased," Feb. 4, 2020
This report does not constitute a rating action.
| Primary Contacts: | Daniel Hu, FRM, New York (1) 212-438-2206; daniel.hu@spglobal.com |
| Stephen A Anderberg, New York (1) 212-438-8991; stephen.anderberg@spglobal.com | |
| Robert E Schulz, CFA, New York (1) 212-438-7808; robert.schulz@spglobal.com | |
| Ramki Muthukrishnan, New York (1) 212-438-1384; ramki.muthukrishnan@spglobal.com |
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 acknowledgment 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 non-public 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.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.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.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.