(Editor's Note: On April 13, 2021, due to popular demand, we added an excel file listing underlying tranches that have had their ratings lowered in the second half of 2020 due to the pandemic [beneath table 3 in the Recap Of 2020 Rating Actions section].)
Key Takeaways
- Both U.S. broadly syndicated loan collateralized loan obligations (BSL CLOs) and middle-market (MM) CLOs experienced credit stress due to the pandemic, but most transactions saw material improvement in the second half of the year (though not enough to make up for the deterioration from the first half).
- Like BSL CLOs, MM CLOs experienced a significant increase in their 'CCC' buckets in 2020.
- However, unlike BSL CLOs, MM CLOs, on average, did not lose par in 2020.
- MM CLOs experienced a less severe decline in O/C cushion. About 5% of our sample of MM CLOs experienced a junior O/C failure at some point in 2020, compared to just under 25% of our BSL CLO sample.
- From an asset diversity standpoint, we find most MM obligors tend to be held by one CLO manager, while most BSL obligors are much more widely held across numerous CLO managers.
The advent of the COVID-19 pandemic and the resulting shutdowns in early 2020 presented significant performance challenges to many of the companies whose loans were held in U.S. collateralized loan obligation (CLO) transactions. With some companies in consumer-facing sectors facing the prospect of a second quarter with severely impacted business and earnings, negative actions on corporate ratings came swiftly amongst rated broadly syndicated loan (BSL) issuers. Many of the same pressures faced the credit-estimated companies within S&P Global Ratings-rated middle-market (MM) CLO transactions as well (see "Credit Estimates For Entities Backing U.S. Middle-Market CLOs Took A Hit From COVID-19," published Dec. 1, 2020). It wasn't long before the effects of lowered credit estimates were felt within MM CLO portfolios, followed by a reduction in cushion amongst their overcollateralization (O/C) tests.
This change in portfolio credit and CLO metrics resulted in a modest number of downgrades on U.S. CLO ratings. However, in spite of the fact that companies held in MM and BSL CLOs both experienced stresses due to the pandemic, the outcomes of how the two CLO types fared in 2020 ended up being somewhat different. To examine those differences in performances, we took samples of each type of CLO and studied their 2020 performance for some interesting findings, which we discuss below.
Before COVID-19: The Rise Of MM CLOs
According to S&P's Leverage Commentary Data (LCD), there was a steady increase in the number of MM CLOs issued between 2015 (12 issued for the year) and 2019 (32 issued for the year). In 2020, 27 MM CLOs were issued, despite a first half with light CLO issuance due to uncertainty about the direction of the credit markets because of the pandemic. As a result of the increased number of MM CLOs outstanding, in the three years preceding the onset of the pandemic, there was also an increase in the number of outstanding credit estimates on issuers with loans held in MM CLOs, to about 1,300 in 2020 from 650 in 2017. For this purpose, we define an outstanding credit estimate as one that has a performing score (credit estimate score of 'ccc-' and higher), and which was assigned less than one year ago (for more details, see "Anatomy Of A Credit Estimate: What It Means And How We Do It," published Jan. 14, 2021).
At the start of 2021, there were 111 MM CLOs that were rated by S&P Global Ratings for which we have received trustee reports (there are a handful of deals rated at the end of 2020 that have not yet issued their first trustee report, and these have been excluded). As seen in the chart below, the MM CLOs are not all the same: individual MM CLOs have significantly different proportions of loans in their portfolios from issuers that are credit estimated. The remaining, non-credit estimated loans come from issuers that are either publicly or privately rated, or for which we derive ratings from methods in our criteria other than credit estimates. If we're not able to derive any rating or implied rating for a performing issuer, we treat it as 'CCC-' under our criteria and within the tables and S&P Global Ratings' weighted average rating factor [SPWARF] calculations below.
Chart 1
U.S. BSL CLO And MM CLO 2020 Comparison
For this study, we focused on two samples of CLOs: a cohort of 61 MM CLOs issued across 20 managers and a cohort of 404 BSL CLOs issued across 75 managers. The BSL CLO cohort is the same cohort referenced within our 2020 recap of U.S. BSL CLOs in "U.S. CLO Insights Index 2020 Review: Coping With COVID-19," published Jan. 14, 2021. Both cohorts consist of CLOs that already began issuing trustee reports as of the start of 2020, and are scheduled to reinvest for all of 2020. To maintain comparability in the metrics over time, we excluded deals where during 2020 there were significant structural changes due to upsize resets or senior note paydowns from principal cash, and CLOs with variable-funding notes.
Obligors in MM CLOs are mostly held by a single manager, while BSL obligors are held by many
At the start of 2020, the 61 MM CLOs in our sample together had exposure to 1,543 parent issuers, while the 404 BSL CLOs together had exposure to 1,476 parent issuers. Many of the exposures held within the MM CLO portfolios are unique to one MM CLO manager: 1,065 issuers out of 1543, or 51%, on a dollar weighted basis. For our BSL CLO sample, issuers held by only one manager were rare, as only 91 issuers out of 1476 are held only within the BSL CLOs issued by one BSL manager. In fact, several of the most widely held issuers are held across 60-plus managers (see table 1 and "The Most Widely Referenced Corporate Obligors In Rated U.S. BSL CLOs: Fourth-Quarter 2020," published Jan. 7, 2021, for the list of top 250 issuers in our U.S. BSL CLOs).
Table 1
| Uniqueness Of MM And BSL CLO Portfolios | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| MM sample (61 U.S. MM CLOs) | BSL sample (404 U.S. BSL CLOs) | |||||||||
| Exposures | Count of issuers (no.) | % AUM across MM CLO sample | Count of issuers (no.) | % AUM across BSL CLO sample | ||||||
| Total count of parent issuers within sample | 1,543 | 100.00 | 1,476 | 100.00 | ||||||
| Exposure across one manager only | 1,065 | 50.99 | 91 | 0.18 | ||||||
| Exposure across two managers | 302 | 24.41 | 54 | 0.28 | ||||||
| Exposure across three managers | 111 | 12.83 | 48 | 0.35 | ||||||
| Exposure across four managers | 43 | 6.88 | 43 | 0.50 | ||||||
| Exposure across five managers | 15 | 2.96 | 59 | 0.91 | ||||||
| Exposure across six managers | 4 | 0.92 | 59 | 0.91 | ||||||
| Exposure across seven managers | 2 | 0.55 | 62 | 1.45 | ||||||
| Exposure across eight or more managers | 1 | 0.47 | 1,060 | 95.42 | ||||||
| MM--Middle manager. BSL--Broadly syndicated loan. CLO--Collateralized loan obligation. AUM--Assets under management. | ||||||||||
Start And End Points Of Both Cohorts' 2020 Performances Differ Somewhat
Most U.S. BSL and MM CLO portfolios experienced credit deterioration in 2020 due to the pandemic. We summarized the average change in U.S. MM and BSL CLO portfolio performance in 2020 across various parameters in table 2 below.
Table 2
| Average Change In U.S. MM And BSL CLO Portfolio Credit Metrics During 2020 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Par (%) | Jr. O/C cushion (%) | SPWARF | 'B-' (%) | 'CCC' bucket (%) | No derived S&P Global Ratings' credit rating (%)(i) | Non-performing (%) | WAS (%) | WAL | ||||||||||||
| MM | ||||||||||||||||||||
| Start | 5.24 | 3,813 | 66.97 | 9.63 | 7.67 | 0.74 | 5.27 | 3.88 | ||||||||||||
| End | 4.16 | 3,980 | 63.74 | 17.70 | 7.33 | 1.42 | 5.27 | 3.48 | ||||||||||||
| Change | 0.08 | (1.08) | 167 | (3.23) | 8.07 | (0.33) | 0.68 | 0.00 | (0.41) | |||||||||||
| BSL | ||||||||||||||||||||
| Start | 3.88 | 2,644 | 19.97 | 3.99 | 0.10 | 0.54 | 3.56 | 5.01 | ||||||||||||
| End | 2.16 | 2,837 | 25.00 | 8.69 | 0.03 | 1.02 | 3.55 | 4.69 | ||||||||||||
| Change | (0.99) | (1.72) | 194 | 5.03 | 4.70 | (0.07) | 0.48 | (0.01) | (0.32) | |||||||||||
| (i)Treated as 'CCC-' for SPWARF. MM--Middle market. BSL--Broadly syndicated loan. CLO--Collateralized loan obligation. O/C--Overcollateralization. WAS--Weighted average spread. WAL--Weighted average life. SPWARF--S&P Global Ratings' weighted average rating factor. | ||||||||||||||||||||
Most of these credit-related metrics ended the year in worse shape than where they started (see the Appendix for a month-by-month breakdown). We review some of them below.
SPWARF
Despite starting in 2020 with significant differences in credit quality, both BSL and MM CLOs experienced credit distribution due to the pandemic, resulting in increases to SPWARF values for both cohorts (see chart 2).
Chart 2
Non-performing assets
Interestingly, the proportion of portfolio exposure to non-performing issuers across the two samples were fairly similar during 2020 (see chart 3; the spike in the BSL line is partially due to the distressed exchange of widely held BSL CLO obligor Envision in late April through early May).
Chart 3
'CCC' buckets
'CCC' buckets increased for both BSL and MM CLOs in 2020. 'CCC' buckets for BSL CLOs more than doubled in March (to 10% from 4%), and increased further in April, before gradually declining after May. 'CCC' buckets for MM CLOs started the year at a much higher level, but experienced more of gradual increase between March and July (see chart 4).
Chart 4
Jr. overcollateralization (O/C) cushion
Defaults along with increases in the 'CCC' buckets for both samples resulted in a decline in O/C test cushions. Within CLO transaction documents, defaults are generally haircut by the lower of the market price or rating agency recovery values, while excess 'CCCs' above a defined threshold proportion are generally haircut by the market price. Haircuts on the BSL CLOs came quickly given the volatility in the BSL loan prices and the pace of corporate downgrades into the 'CCC' buckets as O/C cushions of BSL CLOs dropped sharply in the second quarter.
Given that the market prices of MM loans are less transparent than prices for BSL loans (many loans in MM CLOs are only held by a single manager and not actively traded), and the changes for credit estimates during the pandemic occurred over months rather than weeks, the O/C decline for MM CLOs was more gradual than for BSL CLOs (see chart 5).
Chart 5
Other Findings
Some of the notable trends in 2020 we discovered include the following:
- Similar to the BSL CLOs, MM CLOs portfolios experienced turnover into different issuers, while some loans to the same issuer saw terms negotiated (change in spread, maturity, etc.).
- On average, MM CLOs ended the year with more par preservation relative to BSL CLOs.
- MM CLOs experienced a reduced and a more measured decline in O/C cushion as most of the deals did not lose par and had a higher 'CCC' trigger (typically set at 17.5%, as opposed to 7.5% for typical BSL CLOs). About 5% of the MM CLO sample failed their tranche OC tests at some point during 2020, whereas just under a quarter of the sample of BSL CLOs experienced a junior O/C failure at some point in 2020.
Recap Of 2020 Rating Actions
As corporate rating actions and lowered credit estimates accumulated within BSL and MM CLO portfolios, by the start of the second half of 2020, we had placed several hundred CLO ratings on CreditWatch with negative implications. During the third quarter, we resolved these CreditWatch negative placements and lowered our ratings on hundreds of CLO tranches.
However, as discussed, given the higher overcollateralization of MM CLOs tranches, most of which was preserved during the downturn (the MM portfolios on average, did not lose par by the end of 2020), a smaller proportion of the MM CLO tranche ratings wound up experiencing a downgrade in 2020.
Table 3
| U.S. BSL And MM CLO CreditWatch Resolutions And Non-CreditWatch Downgrades In Second-Half 2020 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Rating as of July 12, 2020 | Rating actions in second-half 2020 | |||||||||||||||||
| Rating category as of July 12 | O/S rating as of July 12 | Watch Neg as of July 12 | Affiormation (off Watch Neg) or no downgrade | One-notch downgrade | Two-notch downgrade | Three-notch downgrade | Four-notch downgrade | Five-notch downgrade | ||||||||||
| BSL | ||||||||||||||||||
| 'AAA' | 904 | 904 | ||||||||||||||||
| 'AA' | 780 | 777 | 3 | |||||||||||||||
| 'A' | 675 | 15 | 660 | 10 | 1 | 3 | 1 | |||||||||||
| 'BBB' | 655 | 94 | 572 | 62 | 13 | 5 | 3 | |||||||||||
| 'BB' | 577 | 289 | 324 | 145 | 46 | 40 | 14 | 8 | ||||||||||
| 'B' | 181 | 174 | 72 | 78 | 22 | 9 | ||||||||||||
| 'CCC' | 13 | 11 | 5 | 4 | 4 | |||||||||||||
| 'CC' | 1 | 1 | ||||||||||||||||
| Grand total | 3,786 | 583 | 3,315 | 302 | 86 | 57 | 18 | 8 | ||||||||||
| MM | ||||||||||||||||||
| 'AAA' | 190 | 190 | ||||||||||||||||
| 'AA' | 120 | 120 | ||||||||||||||||
| 'A' | 99 | 1 | 98 | 1 | ||||||||||||||
| 'BBB' | 91 | 91 | ||||||||||||||||
| 'BB' | 49 | 7 | 44 | 3 | 2 | |||||||||||||
| 'B' | 4 | 2 | 3 | 1 | ||||||||||||||
| 'CCC' | 0 | |||||||||||||||||
| 'CC' | 0 | |||||||||||||||||
| Grand total | 553 | 10 | 546 | 4 | 3 | 0 | 0 | 0 | ||||||||||
| BSL--Broadly syndicated loan. MM--Middle market. CLO--Collateralizd loan obligation. | ||||||||||||||||||
The following excel file is a list of U.S. CLO ratings downgraded in the second half of 2020:
2020 MM CLO Performance Fared Better Than BSL CLOs Overall
While BSL CLOs have a high level of industry and obligor diversity, and higher average portfolio credit quality (as indicated by a lower SPWARF), MM CLO portfolios on the other hand, offer higher tranche subordination, coverage test triggers, and loan spread combined with shorter loan maturity. During the downturn in 2020, we find that both BSL and MM CLOs experienced credit deterioration and portfolio turnover; by the end of 2020, however, MM CLO portfolios emerged with better par preservation. The higher tranche subordination, par preservation, and the low exposure to non-performing issuers of MM CLOs contributed to the relatively stable ratings performance of MM CLO notes in 2020.
Related Research
- Anatomy Of A Credit Estimate: What It Means And How We Do It, Jan. 14, 2021
- U.S. CLO Insights Index 2020 Review: Coping With COVID-19, Jan. 14, 2021
- The Most Widely Referenced Corporate Obligors In Rated U.S. BSL CLOs: Fourth-Quarter 2020, Jan. 7, 2021
- Credit Estimates For Entities Backing U.S. Middle-Market CLOs Took A Hit From COVID-19, Dec. 1, 2020
Appendix
Table 4
| Average Middle-Market CLO Portfolio Metrics In 2020 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Jr. O/C cushion (%) | SPWARF | 'B-' (%) | 'CCC' bucket (%) | No derived S&P Global Ratings credit rating(i) (%) | Non-performing (%) | |||||||||
| 1/1/2020 | 5.24 | 3813 | 66.97 | 9.63 | 7.67 | 0.74 | ||||||||
| 2/1/2020 | 5.27 | 3841 | 65.80 | 9.82 | 8.76 | 0.76 | ||||||||
| 3/1/2020 | 5.28 | 3852 | 65.28 | 9.86 | 9.16 | 0.80 | ||||||||
| 4/1/2020 | 5.31 | 3925 | 63.14 | 12.34 | 10.01 | 0.91 | ||||||||
| 5/1/2020 | 4.92 | 3957 | 63.83 | 13.75 | 9.80 | 1.05 | ||||||||
| 6/1/2020 | 4.59 | 4041 | 59.36 | 16.78 | 11.28 | 1.26 | ||||||||
| 7/1/2020 | 4.43 | 4065 | 59.18 | 16.93 | 11.36 | 1.54 | ||||||||
| 8/1/2020 | 4.16 | 4046 | 60.88 | 17.47 | 9.71 | 1.64 | ||||||||
| 9/1/2020 | 4.00 | 4011 | 62.17 | 17.91 | 8.35 | 1.47 | ||||||||
| 10/1/2020 | 3.98 | 4003 | 62.81 | 18.22 | 7.55 | 1.53 | ||||||||
| 11/1/2020 | 3.91 | 3997 | 62.42 | 18.42 | 7.53 | 1.49 | ||||||||
| 12/1/2020 | 4.01 | 3974 | 63.75 | 18.20 | 6.97 | 1.31 | ||||||||
| 1/1/2021 | 4.16 | 3980 | 63.74 | 17.70 | 7.33 | 1.42 | ||||||||
| (i)No derived S&P Global Ratings credit rating treated as 'CCC-' for SPWARF calculations. MM--Middle market. CLO--Collaterlaized loan obligation. O/C--Overcollateralization. SPWARF--S&P Global Ratings' weighted average rating factor. | ||||||||||||||
Table 5
| Average BSL CLO Portfolio Metrics In 2020 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Jr. O/C cushion (%) | SPWARF | 'B-' (%) | 'CCC' bucket (%) | Non-performing (%) | ||||||||
| 1/1/2020 | 3.86 | 2644 | 19.97 | 4.11 | 0.54 | |||||||
| 2/1/2020 | 3.80 | 2645 | 20.20 | 4.07 | 0.56 | |||||||
| 3/1/2020 | 3.76 | 2639 | 20.16 | 4.13 | 0.63 | |||||||
| 4/1/2020 | 3.73 | 2857 | 23.47 | 10.06 | 0.81 | |||||||
| 5/1/2020 | 2.38 | 2986 | 25.40 | 12.31 | 1.61 | |||||||
| 6/1/2020 | 1.13 | 2960 | 25.71 | 11.86 | 1.35 | |||||||
| 7/1/2020 | 1.39 | 2951 | 24.82 | 11.41 | 1.53 | |||||||
| 8/1/2020 | 1.48 | 2925 | 24.35 | 10.66 | 1.57 | |||||||
| 9/1/2020 | 1.56 | 2900 | 24.36 | 10.10 | 1.39 | |||||||
| 10/1/2020 | 1.76 | 2883 | 24.84 | 9.35 | 1.35 | |||||||
| 11/1/2020 | 1.90 | 2865 | 24.52 | 9.03 | 1.35 | |||||||
| 12/1/2020 | 2.04 | 2854 | 24.79 | 8.86 | 1.28 | |||||||
| 1/1/2021 | 2.13 | 2839 | 25.02 | 8.73 | 1.03 | |||||||
| BSL--Broadly syndicated loan. CLO--Collaterlaized loan obligation. O/C--Overcollateralization. SPWARF--S&P Global Ratings' weighted average rating factor. | ||||||||||||
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 | |
| Ramki Muthukrishnan, New York + 1 (212) 438 1384; ramki.muthukrishnan@spglobal.com | |
| Analytical Manager: | Jimmy N Kobylinski, New York + 1 (212) 438 6314; jimmy.kobylinski@spglobal.com |
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