Negative Corporate Rating Actions Accumulate Within U.S. BSL CLO Buckets
In May, downgrades amongst U.S. broadly syndicated loan (BSL) collateralized loan obligation (CLO) exposures outpaced upgrades 22 to 15, a recent high since the pandemic (see "U.S. Corporate Rating Actions Tracker 2022 (As Of June 3)," published June 6, 2022). A handful of U.S. BSL CLO obligors experienced downgrades into the 'CCC' category, while others (including Talen Energy, Envision, and Carestream) saw their ratings lowered to non-performing (see table 1). As a result, exposure to issuers with a non-performing rating across the Index has inched up to 20 basis points (bps) at the start of June. Widely-held Envision saw its issuer credit rating raised to 'CCC/Watch negative' from 'SD' on May 16, 2022.
Table 1
| U.S. CLO Exposure To Issuers Downgraded Into 'CCC' And Non-performing Category (May 2022) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Rating | ||||||||||||
| Action date | Issuer name | GIC | To | From | U.S. BSL cohort as of first-quarter 2022 | |||||||
| 5/3/2022 | Intrado Corp. | IT services | CCC+/Stable | B-/Negative | Top 250 | |||||||
| 5/11/2022 | DIEBOLD NIXDORF INC. | Technology hardware, storage, and peripherals | CCC+/Watch negative | B-/Positive | 751 to 1,000 | |||||||
| 5/12/2022 | pH Beauty Holdings III Inc. | Personal products | CCC+/Negative | B-/Negative | 1,500+ | |||||||
| 5/25/2022 | Carrols Restaurant Group Inc. | Hotels, restaurants, and leisure | CCC+/Negative | B-/Stable | 1,001 to 1,250 | |||||||
| 5/26/2022 | TecoStar Holdings Inc. | Health care equipment and supplies | CCC+/Negative | B-/Negative | 251 to 500 | |||||||
| 5/3/2022 | Carestream Health Inc. | Health care equipment and supplies | CC/Watch negative | B-/Stable | 251 to 500 | |||||||
| 5/3/2022 | Envision Healthcare Corp. | Health care providers and services | SD | CCC/Watch negative | Top 250 | |||||||
| 5/10/2022 | Talen Energy Supply LLC | Independent power and renewable electricity producers | D | CCC/Negative | 501 to 750 | |||||||
| BSL--Broadly syndicated loan. CLO--Collateralized loan obligation. | ||||||||||||
Despite these negative rating actions, we note that CLO 'CCC' asset buckets still remain well below the typical 7.5% threshold for a large majority of transactions in the Index. The recent drop in loan prices, by itself, will likely have a limited impact on CLO junior overcollateralization (O/C) test cushions, for now.
Table 2
| CLO BSL Index Metrics (CLO Insights 2022 U.S. BSL Index) | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As of date | 'B-' (%) | 'CCC' category (%) | Nonperforming category (%) | SPWARF | WARR (%) | Watch negative (%) | Negative outlook (%) | Weighted avg. price of portfolio ($) | Jr. O/C cushion (%) | % of target par | Turnover (%) | SOFR exposure (%)(i) | ||||||||||||||
| Jan. 2022 | 26.41 | 4.94 | 0.17 | 2700 | 60.44 | 0.88 | 12.33 | 98.79 | 4.37 | 99.68 | 0.00 | 1.14 | ||||||||||||||
| Feb. 2022 | 27.16 | 4.27 | 0.37 | 2708 | 60.43 | 0.28 | 11.94 | 98.83 | 4.41 | 99.68 | 5.68 | 2.77 | ||||||||||||||
| March 2022 | 27.09 | 4.26 | 0.39 | 2708 | 60.41 | 0.11 | 11.35 | 98.02 | 4.40 | 99.68 | 8.15 | 6.64 | ||||||||||||||
| April 2022 | 27.44 | 4.17 | 0.13 | 2690 | 60.45 | 1.06 | 10.86 | 97.88 | 4.31 | 99.69 | 11.35 | 9.53 | ||||||||||||||
| May 2022 | 27.76 | 4.26 | 0.14 | 2700 | 60.45 | 1.20 | 9.83 | 97.57 | 4.30 | 99.70 | 14.46 | 11.55 | ||||||||||||||
| June 2022 | 27.70 | 4.14 | 0.20 | 2706 | 60.48 | 1.27 | 10.46 | 94.60 | 4.39 | 99.71 | 16.66 | 12.47 | ||||||||||||||
| (i)Based off trustee reports dated within one month prior to being available to us at the start of each month. This index includes only 2021 vintage and prior transactions that have closed with CLO liabilities indexed to LIBOR (excludes 2022 vintage CLOs that would be indexed to SOFR). BSL CLO--Broadly syndicated loan collateralized loan obligation. SPWARF--S&P Global Ratings' weighted average rating factor. WARR--Weighted average recovery rate. O/C--Overcollateralization. SOFR--Secured Overnight Financing Rate. See Appendix section for details about the CLO Insights 2022 U.S. BSL Index. | ||||||||||||||||||||||||||
CLO Tranche MVOCs Decline While O/C Cushions Remain Stable
Of the trustee reports available to us at the start of June, 'BB' tranche O/C test cushions (the dashed lines in chart 1) remained stable through the second quarter. This contrasts with market value coverage for these same tranches, which fell significantly over the same period. If BSL CLO 'CCC' baskets were significantly exceeding their typical 7.5% allowance, this drop in loan prices could have had a material impact on 'BB' tranche O/C test cushions, but this isn't the case so far.
Chart 1
The drop in loan prices have caused market value O/Cs (the market value of CLO portfolio divided by the cumulative sum of the CLO tranches; MVOCs) to drop notably (the solid lines in chart 1). Some of the junior tranches across the Index now have MVOCs that are below 100% (about 5% of the junior tranches across the Index originally rated within the 'BB' category have MVOCs below 100%; about 40% of the tranches originally rated within the 'B' category have MVOCs below 100%). We note many of the transactions that have lower MVOCs and lower junior O/C cushions are from pre-pandemic CLOs. Given the economic stress these transactions saw in 2020, this cohort entered the year with a lower par balance (relative to their target par balance) and higher 'CCC' and non-performing buckets, which have contributed to the lower O/C cushions and MVOC values this year.
CLOs are not market value structures, and loan prices are not a direct input within our CLO ratings analysis. However, MVOCs below 100% may have implications for amortizing CLOs as it makes optional redemptions through portfolio liquidation at market prices significantly harder. Not being able to optionally redeem an amortizing transaction exposes the junior tranches to future credit deterioration of the CLO obligors that remain in the residual portfolio.
Loan Maturity Wall Is More Pushed Out Among Reinvesting U.S. CLO Obligors
Currently, about 100 S&P Global Ratings-rated U.S. CLOs with about $38 billion in assets under management have exited their reinvesting period and are currently in their amortization phase. Relative to the assets held within reinvesting U.S. BSL CLO portfolios, a higher proportion of the loans held in amortizing CLOs:
- Are from obligors rated 'CCC+' and below (8.0% vs 4.4%);
- Were trading below 90 as of the start of June 2022 (9.7% vs 6.9%); and
- Are maturing in 2025 or sooner.
The maturity wall for the overall corporate loan market is well pushed out after the leveraged loan refinancing wave of 2021 (see chart 2). It isn't currently a significant credit concern, but we did find the gap between the maturity profiles of assets in reinvesting BSL CLO and amortizing CLOs interesting, as it is likely largely a function of CLO vintage.
Chart 2
Appendix: CLO Insights 2022 Index U.S. BSL Index
The CLO Insights 2022 Index U.S. BSL Index (2022 Index) is an index of just over 600 S&P Global Ratings-rated U.S. BSL collateralized loan obligations (CLOs) that had already started issuing trustee reports by the start of 2022 and based on their transaction documents aren't scheduled to exit their reinvestment period during 2022. The 2022 Index includes CLOs across various vintages (including deals that were reset) issued by 121 different CLO managers. The 2022 Index excludes static deals and deals that, based on their transaction documents, we expect to exit their reinvestment period before the end of 2022. We plan to provide monthly updates of key metrics based off this index for the remainder of 2022 (see table 2).
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 | |
| Secondary Contact: | Deegant R Pandya, New York + 1 (212) 438 1289; deegant.pandya@spglobal.com |
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