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SF Credit Brief: Average 'CCC' Bucket Of CLO Insights Index Breaks Into Single Digits; Managers Turnover 15% Of Their Portfolios During COVID-19

We are providing an update on the CLO Insights 2020 Index on a more frequent basis to assess the impact of recent negative rating actions on the obligors held in U.S. broadly syndicated (BSL) collateralized loan obligation (CLO) collateral pools.

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Average 'CCC' Bucket Of CLO Insights 2020 Index Breaks Into Single Digits At 9.5%

Since our last update, the average 'CCC' bucket of the CLO Insights 2020 Index dropped into single-digit territory at 9.5%, partially due to rating actions on two travel-related issuers that have loans widely held across U.S. BSL CLOs. The gradual decrease in CLO 'CCC' asset buckets reflects a stabilizing Corporate loan market. Both of the travel-related obligors that fell out of 'CCC' buckets are within the top 250 list of most widely held issuers as of second-quarter 2020: Our 'B-' rating on WestJet Airlines was affirmed and removed it from CreditWatch negative (thus no longer part of the 'CCC' bucket), and our rating on Travelport was lowered to 'CC' (non-performing) from 'CCC' due to restructuring concerns. Table 1 shows recent rating actions on top 250 most widely held issuers in U.S. BSL CLOs.

Table 1

Recent Rating Actions On Top 250 Most Widely Held Issuers In U.S. BSL CLOs
Rating
Action date Issuer GIC sector Current Previous
Sept. 15, 2020 Penn National Gaming Inc. Hotels, restaurants, and leisure B/Negative B/Watch Neg
Sept. 17, 2020 WestJet Airlines Ltd. Airlines B-/Negative B-/Watch Neg
Sept. 23, 2020 Travelport Finance (Luxembourg) S.A.R.L IT services CC/Watch Neg CCC/Negative
Sept. 23, 2020 UFC Holdings LLC Entertainment B/Stable B/Watch Neg
BSL--Broadly syndicated loan. CLO--Collateralized loan obligation. GIC--Global Industry Classification Standard.

CLO Insights 2020 Index

As a result of various Corporate rating actions over the past two weeks, the average 'CCC' bucket dropped to single digits, non-performing buckets experienced a slight uptick, and the proportion of CLO assets on CreditWatch negative reached a recent low since COVID-19 began (see table 2).

Table 2

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
March 1, 2020 20.16 4.13 0.63 3.76 95.83 2639 (0.07) 1.61 17.18 18.79
April 5, 2020 23.47 10.06 0.81 3.73 83.11 2857 (0.10) 10.71 24.37 35.08
May 3, 2020 25.40 12.31 1.61 2.38 86.73 2986 (0.23) 9.82 32.56 42.38
June 8, 2020 25.71 11.86 1.35 1.13 91.90 2960 (0.34) 8.42 36.34 44.76
July 6, 2020 24.82 11.41 1.53 1.39 91.14 2951 (0.39) 6.42 37.60 44.02
Aug. 2, 2020 24.35 10.66 1.57 1.48 92.60 2925 (0.55) 5.76 38.69 44.45
Sept. 7, 2020 24.36 10.10 1.39 1.56 94.41 2900 (0.66) 4.57 38.32 42.89
Sept. 27, 2020 24.39 9.55 1.53 1.69 94.33 2896 (0.69) 3.14 38.15 41.29
CLO--Collateralized loan obligation. O/C--Overcollateralization. SPWARF--S&P Global Ratings weighted average rating factor.

Manager Value Update: In Six Months Of Trading During COVID-19, Portfolio Turnover Is At About 15%

Our study "Under Stress: Assessing CLO Manager Performance During COVID-19," published, June 1, 2020, reviewed manager intervention within the early days of COVID-19 (between early March and late May). We found that within the roughly three-month period from March through end of May, reinvesting U.S. BSL CLOs experienced portfolio turnover of about 8.75% on average. The turnover reduced exposure to 'CCC' and non-performing issuers by 1.23%, but also resulted in par loss of about 21 basis points (bps) on average.

We updated this analysis with data up to early September, adding June, July, and August information, and now have data reflecting about half a year's worth of CLO manager trades (see table 3). While there were far fewer negative Corporate rating actions in June, July, and August than the three months prior, this did not translate into significantly lower CLO portfolio turnover. Within the six months between early March and early September, we found that reinvesting U.S. BSL CLOs experienced portfolio turnover of about 15.28% on average (up from the 8.75% within the first three months mentioned above). As a result of the six months' worth of turnover, exposure to 'CCC' and non-performing issuers were reduced by 3.19%, while par loss increased to 58 bps on average (the increase in par loss was also partially due to restructuring activity).

Table 3

Summary Of Three Months' Worth Of Trades And Six Months' Worth Of Trades During COVID-19
March 1-May 25 (three-month update) (%)(i) March 1-Sept. 7 (six-month update) (%)
Turnover 8.75 15.28
Reduction in 'CCC' 0.93 2.66
Reduction in non-performing 0.30 0.53
Reduction in 'CCC' and non-performing 1.23 3.19
Reduction in par 0.21 0.58
(i)From June 1 publication.

Within individual CLO portfolios, there was high variance in turnover ranging from less than 10% to over 45% over the six-month timespan. As noted within our June 1st Under Stress publication, we found that CLOs that were closer to failing their overcollateralization (O/C) tests were more likely to have experienced higher volumes of portfolio turnover in the first three months of the pandemic, on average. In hindsight, the March-May period represented the peak of Corporate downgrades by volume. While there was less Corporate rating downgrade volume in June through August, we observed that exposure to loans from companies with payment defaults (excluding 'CC' and 'SD') began to increase. Although 'CCCs' have declined off the peak into single digits, with the typical BSL CLO 7.5% limit of 'CCC' holdings carried at par seemingly within reach, par loss and exposure to loan payment defaults will continue to be a drag for some O/C ratios as we head into the October payment date (about 10% of the CLO Insights 2020 Index are still failing their junior O/C tests).

Related Research

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 (1) 212-438-8991;
stephen.anderberg@spglobal.com
Robert E Schulz, CFA, New York (1) 212-438-7808;
robert.schulz@spglobal.com
Secondary Contact:Deegant R Pandya, New York (1) 212-438-1289;
deegant.pandya@spglobal.com

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