We are providing an update on the CLOs Insights 2020 Index on a weekly basis to assess the impact of the recent negative rating actions on the obligors held in U.S. broadly syndicated (BSL) collateralized loan obligation (CLO) collateral pools.
CLO Insights 2020 Index
About 9% of corporate obligors across the CLO Insights 2020 Index have issuer credit ratings on CreditWatch with negative implications, while more than 30% carry a negative rating outlook. Of the 410 transactions in the index, over 200 CLOs have at least one tranche rating currently listed on CreditWatch. Overall, ratings on more than 28% of U.S. BSL CLO collateral have been lowered or placed on CreditWatch since early March, while 418 tranches across 316 CLO transactions are currently listed on CreditWatch with negative implications.
| CLO Index Metrics (CLO Insights 2020 Index) | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As of date | 'B-' (%) | 'CCC' Category (%) | Nonperforming category (%) | Jr. O/C cushion (%) | Weighted avg. price of portfolio | SPWARF | Par change (%) | Watch negative (%) | Negative outlook (%) | Negative outlook or Watch negative (%) | ||||||||||||
| Jan. 1, 2020 | 19.97 | 4.11 | 0.54 | 3.86 | 97.45 | 2644 | 0.00 | 1.63 | 17.36 | 19.00 | ||||||||||||
| Feb. 1, 2020 | 20.20 | 4.07 | 0.56 | 3.80 | 97.55 | 2645 | (0.04) | 1.33 | 17.66 | 18.79 | ||||||||||||
| Mar. 1, 2020 | 20.16 | 4.13 | 0.63 | 3.76 | 95.83 | 2639 | (0.07) | 1.61 | 17.18 | 18.79 | ||||||||||||
| Mar. 20, 2020 | 22.91 | 6.92 | 0.65 | 3.74 | 79.53 | 2753 | (0.09) | 8.47 | 18.85 | 27.32 | ||||||||||||
| Mar. 29, 2020 | 23.23 | 8.43 | 0.72 | 3.73 | 80.92 | 2807 | (0.09) | 9.89 | 20.86 | 30.75 | ||||||||||||
| Apr. 05, 2020 | 23.47 | 10.06 | 0.81 | 3.73 | 83.11 | 2857 | (0.10) | 10.71 | 24.37 | 35.08 | ||||||||||||
| Apr. 12, 2020 | 23.86 | 10.91 | 1.36 | 3.72 | 86.22 | 2923 | (0.10) | 10.62 | 27.40 | 38.01 | ||||||||||||
| Apr. 19, 2020 | 23.83 | 11.84 | 1.66 | 3.59 | 87.32 | 2965 | (0.10) | 9.92 | 29.79 | 39.71 | ||||||||||||
| Apr. 26, 2020 | 24.47 | 12.10 | 1.65 | 3.00 | 86.80 | 2975 | (0.17) | 10.07 | 32.18 | 42.25 | ||||||||||||
| May.03, 2020 | 25.40 | 12.31 | 1.61 | 2.38 | 86.73 | 2986 | (0.23) | 9.82 | 32.56 | 42.38 | ||||||||||||
| May.10, 2020 | 25.67 | 12.33 | 1.27 | 2.14 | 87.08 | 2971 | (0.25) | 9.24 | 34.16 | 43.40 | ||||||||||||
| Note: The CLO Insights 2020 Index is an index of 410 U.S. BSL CLOs rated by S&P Global Ratings that will be reinvesting for all of 2020. O/C--Overcollateralization. SPWARF--S&P Global Ratings Weighted Average Rating Factor. | ||||||||||||||||||||||
As April 2020 trustee reports are being processed, we see that average junior O/C cushions are beginning to decline, falling to 2.1% across the CLO Insights 2020 Index, from 3.8% at the start of the year. Some deals have experienced several percentage point declines from prior-month reports, while others have eroded all of their O/C cushion within one month. Within the trustee reports we have read through as of May 10, over 100 of the U.S. BSL CLOs rated by S&P Global Ratings are failing one or more of their O/C tests (including amortizing CLOs). As more late March and early April reports roll in, we expect the average cushion for the CLO Insights 2020 Index to continue to decline.
Some senior notes of reinvesting CLOs are beginning to experience paydowns due to interest diversion. Of the deals with failing O/C tests based on April payment reports, 39 experienced paydowns to the senior notes by about 0.7% (as a percentage of the original balance of the senior note) on average, and 21 of these deals also saw interest deferrals worth about 2.2% (as a percentage of the original balance of the deferrable notes) on average.
SPWARF Declines Slightly For The First Time Since March 2020
SPWARF for the CLO Insights 2020 Index has declined slightly for the first time since the start of March, as exposure to nonperforming issuers has declined to 1.3%, from 1.6% last week. The changes are partially due to the upgrade on Envision Healthcare Corp. to 'CCC' from 'SD' (332 of the 410 deals within the index have exposure to Envision). Envision loans were worth about 0.43% of overall exposure across the index and, despite this large exposure now being within the 'CCC' bucket, the overall 'CCC' bucket only increased by 0.02% this week (to 12.33% from 12.31%). This means there has been a reduction in 'CCC' exposures outside of Envision. Given there were next to no upgrades last week, this suggests 'CCC' exposures are actively being sold out of CLO portfolios across the index.
Chart 1
Chart 2
'CCC' Bucket Stabilizes As CLO Portfolios Churn…At The Cost Of Par For Some Deals
Since the start of March (before COVID concerns came into focus), the 410 deals in the CLO Insights 2020 Index saw turnover of about 12.5% of their portfolios (some turned over as little as 4%, while others turned over almost 40%). Many deals across the index experienced a notable decline in par balance (on average, 25 basis points lower relative to the start of 2020, ranging from 0.84% to (2.29)%), indicating that managers may be selling weaker assets at less than par--perhaps part of the reason 'CCC' buckets have stabilized. Meanwhile, another smaller cohort of deals have experienced par gain from purchases at below par, while others saw a slight bump in par as interest cash was diverted to reinvest into new assets (interest diversion test failures, but not tranche O/C test failures). The senior note paydown due to interest diversion (from tranche O/C test failure) is also another form of "effective" par gain through liability paydown (the par change calculation within this report does not factor in the change to the liability balances).
Related Research
- U.S. CLO Exposure To Negative Corporate Rating Actions (As Of May 3, 2020), May 5, 2020
- 48 U.S. BSL CLO Ratings Placed On CreditWatch Negative; Total CreditWatch Negative Count Increases To 406, May 1, 2020
- 96 U.S. Reinvesting CLO Ratings Placed On CreditWatch Negative; Total CreditWatch Negative Count Increases To 358, April 27, 2020
- Ratings On 155 Classes From 113 U.S. Reinvesting CLOs Placed On Watch Negative, April 17, 2020
- 48 Ratings On 35 U.S. CLOs With Large Exposure to 'CCC' Rated Assets Placed On CreditWatch Negative, April 3, 2020
- 22 Ratings on 15 U.S. Reinvesting CLOs Exposed to Downgrades and Stressed Sectors Placed on CreditWatch Negative, March 27, 2020
- 25 Ratings On 15 U.S. CLO Transactions With Larger Exposures To Energy-related Sectors Placed on Watch Negative, March 20, 2020
The authors would like to thank Bushra Dawawala for her contribution.
This report does not constitute a rating action.
| Primary Credit Analyst: | Daniel Hu, FRM, New York (1) 212-438-2206; daniel.hu@spglobal.com |
| Secondary Contact: | Deegant R Pandya, New York (1) 212-438-1289; deegant.pandya@spglobal.com |
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