After a tumultuous 2020, both U.S. broadly syndicated loan (BSL) and middle-market (MM) collateralized loan obligation (CLOs) experienced improvements across nearly all of their credit metrics in 2021. 2021 was also a record year for U.S. CLO issuance overall. We deep dive into both cohorts' credit metrics and issuance trends in 2021 in this article.

2021 CLO Issuance: A Record Year

2021 was a record year of U.S. CLO issuance. According to LCD, U.S. CLO new issue volume reached nearly $187 billion across 378 transactions in 2021, with 337 of these (89.2%) being BSL CLOs, and the remaining 41 (10.8%) being MM CLOs collateralized by loans to smaller, typically unrated companies. At the start of 2021, we started two CLO indexes comprised of U.S. CLOs that will reinvest for the entirety of 2021: the CLO Insights 2021 U.S. BSL Index (an index of 475 U.S. BSL CLOs) and the CLO Insights 2021 U.S. MM Index (an index of 65 U.S. MM CLOs). The average CLO metrics below are based off the average CLO metrics across these two indexes weighted by transaction count.

According to LCD, there was 27 MM CLO transactions issued in 2020, followed by 41 in 2021. As the count of new CLOs increased, so too has the count of outstanding credit estimates (see chart 1). After plateauing in 2020, the number of outstanding credit estimates outstanding increased to well over 1,500 at the end of 2021, a recent high. By contrast, S&P Global Ratings-rated U.S. BSL CLOs at the end of 2021 have exposure to over 1,700 issuers, a large majority of which (more than 95%) are publicly rated by S&P Global Ratings.

Chart 1

How CLO Exposures To Corporate Sectors Have Changed Over The Past Few Years

Over the past few years, the software and healthcare providers and services sectors have been, and continue to be, the two largest ones in both U.S. BSL and MM CLOs. There have been some shifts in exposure to other widely-held sectors; on average, hotels, restaurants, and leisure and media exposures have both declined, especially within BSL CLOs. Average exposure to obligors in the diversified telecom sector slightly increased across BSL CLOs, mostly driven by a few very widely held exposures such as Liberty Global, Altice Europe, and Lumen Technologies, while telecom exposure across MM CLOs remains minimal.

BSL and MM CLO transactions continue to have high levels of diversity exposure through time; though generally speaking, BSL CLO portfolios have higher industry and obligor diversity. The portfolios across the reinvesting U.S. BSL CLO index has an average effective obligor count of 224 compared to 77 for the portfolios across the reinvesting US MM CLO index, while the effective industry count is 24 and 16, respectively.

Chart 2

Chart 3

Credit Quality Has Slightly Improved…In Most Cases

Both our BSL and MM CLO indexes have experienced improvements across various credit metrics. U.S. BSL CLOs ended 2021 with a slight loss in par of six basis points (bps), far less than the 99 bps of par loss in 2020 (see "CLO Spotlight: How COVID-19 Affected U.S. Middle-Market And BSL CLO Performance In 2020," published Feb. 4, 2021). MM CLOs, on the other hand, saw a 35 bps increase in par in 2021 compared to an eight bps increase in 2020.

Given the high level of corporate loan issuance activity in 2021, we saw high levels of asset turnover across both BSL and MM CLOs during 2021, with both cohorts turning over, on average, roughly half of their assets during the year (see table 1). We also note that both cohorts experienced a slight increase in maturity of exposures, while the weighted average spreads generated by the portfolios remained fairly stable.

Table 1

A majority of deals from both BSL and MM CLOs ended 2021 with a lower S&P Weighted Average Rating Factor (SPWARF), indicating a higher credit rating distribution than their portfolios started the year with, though some ended up with a higher SPWARF (indicating a lower rated portfolio) (see chart 4). Some 2020 vintage U.S. BSL CLOs that started 2021 with a low SPWARF (higher credit quality) ended the year with an increase in SPWARF as they reinvested into some 'B-' rated issuers through the year. Some MM CLOs ended the year with a higher SPWARF due to the expiration of some credit estimates, with these exposures treated as 'CCC-' in our analysis (and SPWARF calculation).

Chart 4

Default asset exposures decline

Exposure to defaulted assets (loans from companies rated lower than 'CCC-') across BSL and MM CLOs started 2021 at slightly elevated levels due to residual exposures from the COVID-19 pandemic-driven downturn in 2020, then slowly declined during the year (see chart 5).

Chart 5

Par and overcollateralization (O/C) cushions have been stable for BSL and MM CLOs

Both BSL and MM CLOs saw a slight dip in par early in the year, mostly due to residual deterioration from 2020. Given the low default levels, both cohorts saw stable par values for the remainder of the year (see chart 6).

Chart 6

Both cohorts saw stable-to-increasing O/C cushions

The increase in O/C cushions across BSL CLOs is mostly due to the pre-pandemic CLOs making up lost ground as 'CCC' asset buckets shrunk. MM CLOs saw increases in O/C cushion mostly due to par gain (see chart 7).

Chart 7

BSL CLOs Have More Asset Overlap Than MM CLOs

Across the BSL market, there are hundreds of issuers with loans that are widely held within BSL CLOs. The 250 largest issuers with loans held within U.S. BSL CLOs represent about half the overall assets within BSL CLO portfolios (see "U.S. BSL CLO Top Obligors And Industries Report: Fourth-Quarter 2021," published Jan. 7, 2022). Across the reinvesting S&P Global Ratings-rated U.S. BSL CLOs at the start of 2022, we see average portfolio overlap of about 19%; much of this due to the outsized exposures to the 250 largest issuers (many of these top 250 issuers are held across hundreds of CLOs). These larger issuers, on average, generally have higher credit quality and have exhibited higher rating stability during 2020, relative to the other smaller issuer exposures that make up the other half of CLO exposures (e.g., top 251-500, 501-750, etc.).

MM CLOs, on the other hand, do not have a large subset of widely held issuers. Instead, many of the exposures are unique to an individual MM CLO manager, across the portfolios they manage. At the start of 2022, we calculate an average issuer overlap of just 2.8% at the manager level across the various S&P Global Ratings-rated MM CLOs managed per manager. There are notable differences between certain pair-wise manager combinations. Some managers have exposure overlap as high as 9%, indicating certain groups of managers lend to particular issuers together (see table 2).

Table 2

2021 Rating Actions Recap: Positive Year Overall

After the pandemic-driven U.S. CLO rating downgrades in 2020, we started 2021 with almost 500 U.S. CLO ratings that were below their original levels, up over tenfold from the prior year before the pandemic. When separated by deal type, we see a large majority of these ratings are from U.S. BSL CLO tranches; only seven tranches from MM CLOs had ratings lower than original at the start of 2021. In 2021, CLO collateral pools saw improvements in credit quality; on Aug. 20, 2021, we placed 252 ratings on CreditWatch with positive implications (see "Two Hundred And Fifty Two CLO Ratings On CreditWatch Positive Due To Improvement; Three Placed On CreditWatch Negative," published Aug. 20, 2021), and by the end of the year, we had resolved all of these CreditWatch positive placements and upgraded 257 tranches across 116 transactions. At the start of 2022, there are still 275 U.S. BSL CLO tranches and four U.S. MM CLO tranches currently rated below their original ratings, mostly across junior tranches (see table 3).

Table 3

Despite having a positive year overall, five ratings from CLO 2.0 tranches saw ratings lowered to 'D' in 2021. All five were junior tranches from older U.S. BSL CLOs that were amortizing through the pandemic in 2020. Additionally, there are seven tranches from five earlier vintage U.S. BSL CLO 2.0s that (at time of publication) have junior notes rated 'CCC- (sf)' or 'CC (sf)' at the start of the year that we view as potential and likely candidates for future default. We note that no tranches from MM CLOs are currently rated as such, and no MM CLO 2.0 tranche has defaulted yet. Despite having a weaker credit profile and lower portfolio diversity, the MM CLOs performed well in 2020 and continue to exhibit a zero default history despite going through the energy slowdown as well as the pandemic.

There were six tranches from three 2006 vintage MM CLO1.0s that saw their ratings lowered to 'D (sf)' over a decade ago due to credit deterioration and unique market value provisions within the indenture (see "U.S. CLO Defaults As Of Dec. 28, 2021," published Jan. 19, 2022).

Underlying MM And BSL Issuers Exhibited Credit Quality Improvements In 2021, Leading To Stable Performance For Both Cohorts

In 2021, there have been credit quality improvements across the underlying BSL and MM issuers. Upgrades outpaced downgrades across the publicly rated BSL issuers while several of the MM issuers were assigned a higher credit estimate in 2021; meanwhile, default rates from both samples declined notably to well below 1%, a recent low for both. Both MM and BSL CLOs exhibited stable performance in 2021, though MM CLOs experienced notable improvements with respect to the portfolio par balance and O/C cushions.