(Editor's Note: This report was updated April 27, 2022.)
Key Takeaways
- The influence of ESG factors in our credit rating analysis of European CLOs primarily depends on the influence of ESG factors in our analysis of the underlying obligors. This influence is reflected in our ESG credit indicators for the underlying obligors, where available.
- Our ESG credit indicator for each underlying obligor is not a sustainability rating or an S&P Global Ratings ESG evaluation. Rather, it isolates our opinion of the influence of ESG factors in our credit rating analysis of that obligor.
- To provide additional disclosure and transparency of the influence of ESG factors for the CLO asset pool in aggregate, we've calculated the weighted-average and distributions of our ESG credit indicators for the underlying obligors.
- The environmental and social credit indicators across European CLO obligors are concentrated in the E-2 and S-2 categories, respectively. We consider that such credit indicators are, on a net basis, a neutral consideration in our credit rating analysis of the underlying obligor.
- Most of the governance credit indicators for European CLO obligors are concentrated in the G-3 category. We consider that such a credit indicator is, on a net basis, a moderately negative consideration in our credit rating analysis of the underlying obligor.
S&P Global Ratings' ESG credit indicators provide additional disclosure and transparency by reflecting its opinion of how material the influence of environmental, social, and governance (ESG) factors is on its credit rating analysis. The extent of the influence of these factors is reflected on an alphanumerical 1-5 scale where '1' is positive, '2' neutral, '3' moderately negative, '4' negative, and '5' very negative (see table 1 and Appendix 2).
Table 1
| ESG Credit Indicators | ||||
|---|---|---|---|---|
| Credit indicator | Definition | |||
| E-1/S-1/G-1 | Factors are, on a net basis,* a positive consideration in our credit rating analysis, affecting at least one analytical component§. | |||
| E-2/S-2/G-2 | Factors are, on a net basis,* a neutral consideration in our credit rating analysis. | |||
| E-3/S-3/G-3 | Factors are, on a net basis,* a moderately negative consideration in our credit rating analysis, affecting at least one analytical component§. | |||
| E-4/S-4/G-4 | Factors are, on a net basis,* a negative consideration in our credit rating analysis, affecting more than one analytical component§ or one severely. | |||
| E-5/S-5/G-5 | Factors are, on a net basis,* a very negative consideration in our credit rating analysis, affecting several analytical components§ or one very severely. | |||
| *"On a net basis" means that we take a holistic view on exposure to factors and related mitigants. §Analytical components include criteria scores and subscores (including the key analytical elements to assess them). "Affecting" means leading to a different outcome for an analytical component or lower/higher headroom for an analytical component. | ||||
Overview
European collateralized loan obligations (CLOs) typically benefit from portfolio diversification in the form of obligors across many countries and industries. The credit rating on each obligor is one of the key inputs used in our CDO Evaluator model to generate a probability distribution of potential default rates for the given portfolio of assets in aggregate (see our CLO criteria in "Related Criteria And Research"). Therefore, if the influence of ESG factors in our credit rating analysis of the underlying obligors is material enough for our credit ratings to be affected, they can also, albeit indirectly, influence our credit rating analysis of CLOs.
For each obligor, where assigned, we will use its ESG credit indicators and euro notional exposure to analyze the influence of ESG factors in European CLOs asset pools. To the extent a specific obligor has not been assigned an ESG credit indicator, for the purposes of this analysis, we have used ESG credit indicators for the parent or super parent under the hierarchy of the obligor as a proxy, where available. ESG credit indicators relate to an obligor's stand-alone analysis or, in the case of a parent company, the group credit profile. An obligor's ESG credit indicator does not reflect the influence of ESG factors on the related parent. As such, the ESG credit indicator could diverge from that of its related parent where assigned (see "ESG Credit Indicator Definitions And Application," published Oct 13, 2021"). Where no ESG credit indicator is available we do not include this obligor in our analysis of the underlying obligor in European CLOs.
Chart 1
Chart 2
The environmental and social credit indicators across European CLO obligors are concentrated in category 2 (E-2 are 90% and S-2 are 86% of their respective credit indicators). We consider that such credit indicators are, on a net basis, a neutral consideration in our credit rating analysis of the underlying obligors.
Most of the governance credit indicators are concentrated in the G-3 category. We consider that such a credit indicator is, on a net basis, a moderately negative consideration in our credit rating analysis of the underlying obligors. We see higher dispersion within the governance credit indicators with 21% in the G-2 category and 75% in the G-3 category. This is in line with the recently published corporate article "ESG Credit Indicators: Key Takeaways For Corporates And Infrastructure".
The Influence Of ESG Factors In European CLOs
Chart 3
Chart 3 features 256 European CLO transactions. Bridgepoint CLO 2 DAC has a weighted-average environmental credit indicator of 2.02 (ranked fourth), a weighted-average social credit indicator of 2.03 (ranked third), and a weighted-average governance credit indicator of 2.82 (ranked 46th). Henley CLO II DAC has a weighted-average environmental credit indicator of 2.00 (ranked first), however the weighted-average social credit indicator is 2.12 (ranked 52nd) and the weighted-average governance credit indicator is 2.99 (ranked 249th).
Chart 4
The weighted-average ESG credit indicators are quite uniform across countries at 2.09, 2.18, and 2.87, respectively.
The weighted-average social credit indicator of obligors domiciled in Portugal is 4.00 and the average governance credit indicator is 5.00, while Panama's average social credit indicator is 5.00 all of which exceed the typical averages by country we see in chart 4. Notably, within our European CLO universe, there are only four obligors that we consider to be domiciled in Portugal and one obligor domiciled in Panama. The notional amount of this exposure represents just over 1.5% of the overall notional considered in this report.
Chart 5
The weighted-average environmental credit indicator is 2.08 across the top 20 industries. Outliers, with an average credit indicator of 2.5 or greater, are "chemicals," "specialty retail," and "containers and packaging".
The industry weighted-average social credit indicator is approximately 2.18. The industry outlier is "hotels, restaurants, and leisure," at 3.33.
The industry weighted-average governance credit indicator is 2.88. The "food and staples retailing" and "specialty retail" industries are the outliers with weighted-average credit indicators of 3.52 and 3.46, respectively.
Environmental Credit Indicators
Environmental credit indicators are heavily influenced by how our industry risk criteria capture environmental risks, including risk of substitution and secular change on our credit rating analysis of European CLO obligors.
Chart 6
The distribution of the weighted-average environmental credit indicators ranges from 2.00 (Henley CLO II DAC) to 2.24 (Accunia European CLO II DAC). Of European CLOs, 64% have a weighted-average environmental credit indicator of below 2.10, with approximately 13% below 2.05. At the higher end of the weighted-average environmental credit indicator range, only 14 transactions (approximately 5%) have a weighted-average credit indicator exceeding 2.15.
Chart 7
Approximately 70% of the European CLO obligors are domiciled in the top five countries shown above. Only the U.K. (79%) and Germany (85%) have less than 90% of obligor notional exposures in the E-1 and E-2 credit indicators, with corresponding larger exposures in the E-3 category.
Chart 8
The top five industries make up approximately 33% of the European CLO obligor exposure. The outlier is "chemicals" with a 45%/55% split between the E-2 and E-3 credit indicators, whereas across other industries the exposure is almost entirely in the E-2 category. Obligor exposure to heavy polluting industries such as "oil, gas, and consumable fuels" is less, therefore does not have a big influence on the weighted-average credit indicator calculations.
Social Credit Indicators
Social factors generally have a less negative influence on our credit ratings analysis of European CLO obligors than governance or environmental factors.
Chart 9
The distribution of the weighted-average social credit indicators ranges from 2.01 (North Westerly VII ESG CLO DAC) to 2.39 (Hayfin Emerald CLO VI DAC). Of European CLOs, 61% have a weighted-average social credit indicator of below 2.20, with approximately 12% below 2.10. At the higher end of the weighted-average social credit indicator range, only 14 transactions (approximately 5%) have a weighted-average credit indicator exceeding 2.30.
Chart 10
The social credit indicators demonstrate more dispersion than the environmental credit indicators, particularly for the U.K. for which 19% of the exposure falls below the S-2 credit indicator, with 13% in the S-3 category and 6% in the S-4 category.
Chart 11
The social credit indicators are concentrated in the S-2 credit indicator, with "diversified telecommunication services" and "commercial services and supplies" notable exceptions.
Governance Credit Indicators
Governance credit indicators on our credit rating analysis of European CLO obligors are strongly linked to our management and governance score in our corporate criteria.
Chart 12
The distribution of the weighted-average governance credit indicators ranges from 2.73 (Hayfin Emerald CLO VII DAC) to 3.04 (Dryden 89 Euro CLO 2020 DAC). Of European CLOs, 72% have a weighted-average governance credit indicator of below 2.90, with approximately 12% below 2.80. At the higher end of the weighted-average governance credit indicator range, only four transactions (approximately 1.5%) have a weighted-average credit indicator exceeding 3.00.
Chart 13
The governance credit indicators are concentrated in the G-3 category, with obligors domiciled in France and the Netherlands having less influence of governance factors in our credit rating analysis, as reflected by the G-2 credit indicators.
Chart 14
The governance credit indicators are quite dispersed across industries, however the governance credit indicators are primarily influenced by the capital structure and/or geography of the obligor.
To learn more about our ESG approach, please review the ESG Credit Indicator Sector Reports found here. We disclose in these reports our ESG credit indicators for the sector. Our ESG credit indicators provide additional disclosure and transparency at the entity level and reflect our opinion of the influence that ESG factors have on our credit rating analysis. They are not a sustainability rating or an S&P Global Ratings ESG Evaluation.
Appendix 1: CLO Data Set
The scope
This report covers S&P Global Ratings-rated CLO underlying obligors in European CLOs for which we have an ESG credit indicator for over 70% of the obligors (hit rate) by notional amount. In the report, we have considered 256 CLOs for our analysis, with an average hit rate of 82% and a range of between 70% to 90% per CLO. The ESG credit indicators used in our analysis of CLO portfolios in aggregate first consider if the specific obligor has been assigned ESG credit indicators. If unavailable, our analysis then looks to whether the parent or super parent under the hierarchy of the obligor. Where no ESG credit indicator is assigned, we do not include this obligor in our analysis of the underlying obligor in European CLOs.
Weighted-average environmental credit indicator
The weighted-average environmental credit indicator of a CLO portfolio provides an indication of the overall environmental credit indicator distribution of the portfolio, weighted by each asset's par balance. The environmental credit indicator for each of the portfolio assets is determined by the obligor's environmental credit indicator (or, if unavailable for the specific obligor, we consider the environmental credit indicator for the parent or super parent in the corporate hierarchy of the obligor as a proxy). The weighted-average environmental credit indicator is calculated by multiplying the par balance of each collateral obligation by the environmental credit indicator, where available, then summing the total for the portfolio and dividing this result by the aggregate principal balance of the collateral obligations included in the calculation. Any obligor without an assigned environmental credit indicator will see its assets' par balance not included in this calculation.
Weighted-average social credit indicator
The weighted-average social credit indicator of a CLO portfolio provides an indication of the overall social credit indicator distribution of the portfolio, weighted by each asset's par balance. The social credit indicator for each of the portfolio assets is determined by the obligor's social credit indicator (or, if unavailable for the specific obligor, we consider the environmental credit indicator for the parent or super parent in the corporate hierarchy of the obligor as a proxy) where available. The weighted-average social credit indicator is calculated by multiplying the par balance of each collateral obligation by the social credit indicator, where available, then summing the total for the portfolio and dividing this result by the aggregate principal balance of the collateral obligations included in the calculation. Any obligor without an assigned social credit indicator will see its assets par balance not included in this calculation.
Weighted-average governance credit indicator
The weighted-average governance credit indicator of a CLO portfolio provides an indication of the overall governance credit indicator distribution of the portfolio, weighted by each asset's par balance. The governance credit indicator for each of the portfolio assets is determined by the obligor's governance credit indicator (or, if unavailable for the specific obligor, we consider the environmental credit indicator for the parent or super parent in the corporate hierarchy of the oblior as a proxy) where available. The weighted-average governance credit indicator is calculated by multiplying the par balance of each collateral obligation by the governance credit indicator, where available, then summing the total for the portfolio and dividing this result by the aggregate principal balance of the collateral obligations included in the calculation. Any obligor without an assigned governance credit indicator will see its assets par balance not included in this calculation.
Appendix 2: ESG Credit Indicators
In our commentary "ESG Credit Indicator Definitions And Application," published Oct. 13, 2021, we discuss the introduction of ESG credit indicators as a complement to our existing credit rating analysis. Whereas our ESG criteria seek to enhance transparency in how and where we capture ESG factors in credit ratings, our ESG credit indicators provide additional disclosure and transparency by reflecting our opinion of how material the influence (on a 1-5 scale) of ESG factors is on our credit rating analysis. We assess these credit indicators on a net basis for each CLO obligor, meaning that we take a holistic view of exposure to environmental, social, and governance factors and related mitigants in the credit rating analysis. They are applied after the rating has been determined. They are not a sustainability rating or an S&P Global Ratings ESG evaluation.[1]
Accordingly, the application--or change--of an ESG credit indicator cannot in itself trigger a credit rating or outlook change. However, the effect of ESG factors on creditworthiness could contribute to a rating action, which in turn could lead to a change in the ESG credit indicator. Through the release of ESG credit indicators, we aim to further delineate and summarize the relevance of ESG factors to our credit analysis by isolating our opinion of their credit influence and separating it from the non-ESG factors affecting the credit rating.
The scale for environmental credit indicators is identical for social and governance credit indicators. It has a negative skew, which reflects our view that environmental, social, and governance considerations (including risks outside of a company's control) have a negative influence more often than a positive one. An ESG credit indicator of E-2, S-2, or G-2 means that it is currently a neutral consideration in our credit rating analysis. This does not necessarily mean that ESG factors are not relevant, rather that they are currently not sufficiently material to alter the credit rating analysis or that positive ESG considerations are offset by ESG-related risks.
Also, entities may have identical ESG credit indicators, even if they diverge on ESG characteristics and performance. This may be the case because we only incorporate in our credit rating analysis those ESG factors that materially influence creditworthiness and for which we have sufficient visibility and certainty or because the differentiation in ESG characteristics is not, in our view, sufficiently material to warrant a different ESG credit indicator outcome.
Appendix 3: ESG Credit Factors Criteria
In our ESG credit ratings criteria "Environmental, Social, And Governance Principles In Credit Ratings," published Oct. 10, 2021, we articulate the principles that we apply to ESG factors into our credit ratings analysis. In that criteria, we define ESG factors as those ESG factors that can materially influence the creditworthiness of a rated entity or issue and for which we have sufficient visibility and certainty to include in our credit rating analysis. We note that when sufficiently material to affect our view of creditworthiness, ESG factors can influence credit ratings.
The following are examples of key ESG credit factors that have affected creditworthiness or that, in our opinion, may influence future creditworthiness.
[1] ESG credit indicators are separate and distinct from S&P Global Ratings ESG evaluations. An S&P Global Ratings ESG evaluation is not a credit rating or component of our credit rating methodology. Rather, the ESG evaluation considers the impacts and dependencies on the environment and society across the value chain for a wide range of stakeholders, regardless of current credit materiality. It indicates our view of an entity's relative exposure to observable ESG-related risks and opportunities, and our qualitative opinion of the entity's long-term sustainability and readiness for emerging trends and potential disruptions. (For more on ESG evaluations, see "Environmental, Social, And Governance Evaluation Analytical Approach," published Dec. 15, 2020.)
Related Criteria And Research
- ESG Credit Indicators: Key Takeaways For Corporates And Infrastructure, March 30, 2022
- ESG In Credit Ratings Newsletter, March 2022, April 1, 2022
- S&P Global Ratings To Enhance Transparency In Structured Finance Transactions With ESG Credit Indicators, March 31, 2022
- ESG Credit Indicator Report Card: Covered Bonds, April 8, 2022
- Weekly European CLO Update, April 19, 2022
- ESG Credit Indicator Definitions And Application, Oct. 13, 2021
- Global Methodology And Assumptions For CLOs And Corporate CDOs, June 21, 2019
- ESG Credit Factors: A Deeper Dive, Nov. 17, 2021
- ESG Credit Indicator Definitions And Application, Oct. 13, 2021
- Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- Environmental, Social, And Governance Evaluation Analytical Approach, Dec. 15, 2020
Editor: Glen Carlstrom. Digital Designer: Tom Lowenstein. Data Researcher: Ben Woodcock.
This report does not constitute a rating action.
| Primary Credit Analysts: | Shane Ryan, London + 44 20 7176 3461; shane.ryan@spglobal.com |
| John Finn, Paris; john.finn@spglobal.com |
|
| Secondary Contacts: | Emanuele Tamburrano, London + 44 20 7176 3825; emanuele.tamburrano@spglobal.com |
| Matthew S Mitchell, CFA, Paris +33 (0)6 17 23 72 88; matthew.mitchell@spglobal.com |
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