(Editor's Note: This report is S&P Global Ratings' monthly summary update of U.S. BSL CLO Index's credit metrics and notable credit themes.)
The slowdown in economic growth, coupled with inflationary pressures and rising interest rates, continues to weigh on companies with high leverage and low interest coverage ratios. Consequently, in March 2023, the count of downgrades across U.S. broadly syndicated loan collateralized loan obligation (BSL CLO) obligors hit their highest point since the depths of the pandemic-driven downturn in 2020. March also saw a number of defaults, with five issuers seeing ratings lowered to 'SD' and seven lowered to 'CC' or 'D'. On a positive note, nine issuers saw ratings raised to a 'CCC' category rating from 'SD' (see table 2).
As a result, the month-over-month average exposure to assets with a rating below 'CCC-' did not change much in March (0.71% vs 0.70% in February), though the increase in exposure to non-performing assets in February and March did have an impact on junior overcollateralization (O/C) cushions, which declined to 4.25% from 4.35%. 'CCC' category exposures increased further, to 5.3% from 5.1%, while exposure to issuers rated 'B-' with a negative rating outlook increased slightly to 4.3% from 4.1%.
The overall proportion of CLO assets from obligors with a negative rating outlook has inched up as well, to 16.8% from 16.3%. Combined with assets from obligors with a rating on CreditWatch negative, currently 0.44%, this gives us 17.24% of CLO assets having a negative rating bias, the highest level since September 2021.
Table 1
| CLO BSL Index metrics (CLO Insights 2022-2023 U.S. BSL Index)(i) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| BSL | 'B-' (%) | 'CCC' category (%) | Nonperforming assets (%) | SPWARF | WARR (%) | Watch negative (%) | Negative outlook (%) | Weighted avg. price of portfolio ($) | Jr. O/C cushion (%) | % of target par | 'B-' on negative outlook (%) | |||||||||||||
| Jan. 2022 | 26.41 | 4.94 | 0.17 | 2700 | 60.44 | 0.88 | 12.33 | 98.79 | 4.37 | 99.68 | 2.00 | |||||||||||||
| Feb. 2022 | 27.16 | 4.27 | 0.37 | 2708 | 60.43 | 0.28 | 11.94 | 98.83 | 4.41 | 99.68 | 1.92 | |||||||||||||
| March 2022 | 27.09 | 4.26 | 0.39 | 2708 | 60.41 | 0.11 | 11.35 | 98.02 | 4.40 | 99.68 | 1.66 | |||||||||||||
| April 2022 | 27.44 | 4.17 | 0.13 | 2690 | 60.45 | 1.06 | 10.86 | 97.88 | 4.31 | 99.69 | 1.59 | |||||||||||||
| May 2022 | 27.76 | 4.26 | 0.14 | 2700 | 60.45 | 1.20 | 9.83 | 97.57 | 4.30 | 99.70 | 1.41 | |||||||||||||
| June 2022 | 27.70 | 4.14 | 0.20 | 2706 | 60.48 | 1.27 | 10.46 | 94.60 | 4.39 | 99.71 | 1.43 | |||||||||||||
| July 2022 | 28.59 | 4.01 | 0.35 | 2720 | 60.27 | 1.35 | 11.08 | 92.19 | 4.45 | 99.74 | 1.80 | |||||||||||||
| Aug. 2022 | 28.70 | 4.00 | 0.34 | 2726 | 60.32 | 1.46 | 11.53 | 93.81 | 4.47 | 99.78 | 1.94 | |||||||||||||
| Sept. 2022 | 29.00 | 4.21 | 0.59 | 2754 | 60.24 | 1.03 | 12.20 | 94.85 | 4.50 | 99.81 | 2.08 | |||||||||||||
| Oct. 2022 | 28.85 | 4.40 | 0.50 | 2751 | 60.16 | 1.16 | 13.36 | 92.12 | 4.50 | 99.82 | 2.86 | |||||||||||||
| Nov. 2022 | 28.85 | 5.02 | 0.40 | 2754 | 60.13 | 0.59 | 14.46 | 92.40 | 4.47 | 99.84 | 3.31 | |||||||||||||
| Dec. 2022 | 29.50 | 4.95 | 0.34 | 2749 | 59.81 | 0.32 | 14.62 | 93.08 | 4.44 | 99.85 | 3.48 | |||||||||||||
| Jan. 2023 | 30.03 | 5.23 | 0.50 | 2764 | 60.20 | 0.14 | 15.18 | 92.88 | 4.45 | 99.85 | 3.84 | |||||||||||||
| Feb. 2023(i) | 30.09 | 5.48 | 0.46 | 2766 | 60.26 | 0.22 | 15.76 | 94.40 | 4.39 | 99.86 | 3.94 | |||||||||||||
| March 2023(i) | 30.52 | 5.14 | 0.71 | 2775 | 60.16 | 0.35 | 16.33 | 94.67 | 4.35 | 99.86 | 4.14 | |||||||||||||
| April 2023(i) | 30.53 | 5.32 | 0.70 | 2771 | 60.23 | 0.44 | 16.77 | 93.82 | 4.25 | 99.87 | 4.28 | |||||||||||||
| (i)A small handful of transactions have dropped off this index for the calculation of the Feb. 1, 2023, and March 1, 2023, metrics as they have exited the reinvestment period in 2023. | ||||||||||||||||||||||||
Table 2
| U.S. corporate rating actions | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Rating | ||||||||||||||
| Action date | Issuer name | GIC | Current day | Previous day | Rank within U.S. BSL CLOs | Date upgraded back to 'CCC' | ||||||||
| 2/8/2023 | Altisource Portfolio Solutions S.A. | Software | CC/Negative | CCC+/Negative | 1,001 to 1,250 | |||||||||
| 2/10/2023 | KNB Holdings Corp. | Household durables | D | CCC-/Negative | 1,251 to 1,500 | |||||||||
| 2/11/2023 | Yak Access LLC | Trading companies and distributors | D | CCC/Negative | 1,001 to 1,250 | |||||||||
| 2/16/2023 | Diamond Sports Group LLC | Media | D | CCC-/Negative | Top 250 | |||||||||
| 2/18/2023 | Premier Brands Group Holdings LLC | Textiles, apparel, and luxury goods | SD | CCC/Negative | 1,251 to 1,500 | 3/3/2023 | ||||||||
| 2/24/2023 | Rising Tide Holdings Inc. | Specialty retail | CC/Negative | CCC/Negative | 1,001 to 1,250 | 3/24/2023 | ||||||||
| 2/25/2023 | Bausch Health Cos. Inc. | Pharmaceuticals | SD | CCC+/Stable | Top 250 | 3/1/2023 | ||||||||
| 3/1/2023 | Equinox Holdings Inc. | Hotels, restaurants, and leisure | SD | CCC-/Negative | 501 to 750 | 3/7/2023 | ||||||||
| 3/2/2023 | Akorn Operating Co. LLC | Pharmaceuticals | D | CCC+/Stable | 1,251 to 1,500 | |||||||||
| 3/3/2023 | Community Health Systems Inc. | Health care providers and services | SD | B-/Stable | N/A | |||||||||
| 3/11/2023 | Loyalty Ventures Inc. | Media | D | CCC+/Negative | 751 to 1,000 | |||||||||
| 3/14/2023 | Bioplan USA Inc. | Personal products | D | CCC/Negative | 1,251 to 1,500 | |||||||||
| 3/14/2023 | Technicolor Creative Studios | Entertainment | D | CCC-/Watch Neg | N/A | |||||||||
| 3/16/2023 | Mallinckrodt PLC | Pharmaceuticals | SD | B-/Stable | N/A | 3/23/2023 | ||||||||
| 3/18/2023 | National CineMedia LLC | Media | D | CCC-/Negative | 1,001 to 1,250 | |||||||||
| 3/21/2023 | WeWork Cos. LLC | Real estate management and development | CC/Negative | CCC+/Negative | 1,251 to 1,500 | |||||||||
| 3/23/2023 | Flint HoldCo S.a.r.l. | Capital markets | SD | CCC/Negative | 1,001 to 1,250 | |||||||||
| 3/31/2023 | Travelport Finance (Luxembourg) S.a.r.l. | IT services | SD | CCC+/Negative | 501 to 750 | |||||||||
| 3/31/2023 | Wahoo Fitness Acquisition LLC | Leisure products | D | CCC-/Negative | 1,251 to 1,500 | |||||||||
| GIC--Global industry classification. BSL CLO--Broadly syndicated loan collateralized loan obligation. SD--Selective default. N/A--Not applicable. | ||||||||||||||
Scenario Analysis On O/C Cushions: Vintage Effect On Full Display
While averages are a useful barometer to indicate what's going on across the BSL CLO universe, it's worth remembering that metrics for different cohorts of transactions can differ significantly. There is a pronounced vintage effect, with pre-pandemic CLOs (those originated in first-quarter 2020 and before) having experienced par loss and credit deterioration resulting in higher 'CCC' asset exposure and lower junior O/C test cushions relative to the post-pandemic transactions. Within the pre-pandemic CLOs, amortizing transactions have even higher 'CCC' asset exposure and lower junior O/C test cushions, on average.
These transactions can be vulnerable to concentration risk as better credits pay down sooner, leaving behind overall weaker credits and greater proportion of 'CCC' in the portfolios. Many of these amortizing pre-pandemic CLOs have already breached the 7.5% 'CCC' threshold as they see additional haircuts to the O/C test numerator on top of the par loss experienced during the pandemic.
Table 3
| Average performance metrics for different cohorts of BSL CLOs (as of March 2023) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| CLO cohort | Avg. jr. O/C test cushion (%) | Avg. 'CCC' asset exposure (%) | Avg. 'B-' asset exposure (%) | Avg. 'B-' on negative outlook (%) | ||||||
| Pre-pandemic - amortizing | 2.53 | 6.33 | 27.18 | 4.28 | ||||||
| Pre-pandemic - reinvesting | 3.69 | 5.44 | 29.87 | 4.10 | ||||||
| Post-pandemic - reinvesting | 5.25 | 4.06 | 31.43 | 3.98 | ||||||
| overall | 4.35 | 5.14 | 30.52 | 4.14 | ||||||
| O/C--Overcollateralization. BSL--Broadly syndicated loan. CLO--Collateralized loan obligation. | ||||||||||
Loan prices are another key factor within O/C cushions. Since last year, loan prices have seen increased volatility, including prices of loans from 'B-' rated issuers that may be at risk of a downgrade into the 'CCC' category. For example, loans from issuers that were downgraded into the CCC category in fourth-quarter 2022 experienced about a 10% decline in loan price during the quarter.
Table 4
| Average price of loans in BSL CLOs | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Loans from all obligors | Loans from obligors with ratings lowered into the 'CCC' range during quarter | |||||||||||||
| Quarter | Price at start of prior quarter | Price at start of quarter | Price at end of quarter | Price at start of quarter prior to DG | Price at start of DG quarter | Price at end of DG quarter | ||||||||
| Q1 2022 | 98.82 | 98.79 | 97.88 | 96.98 | 95.92 | 92.51 | ||||||||
| Q2 2022 | 98.79 | 97.88 | 92.19 | 93.68 | 91.73 | 84.83 | ||||||||
| Q3 2022 | 97.88 | 92.19 | 92.12 | 93.99 | 83.46 | 75.36 | ||||||||
| Q4 2022 | 92.19 | 92.12 | 92.88 | 86.91 | 80.66 | 71.72 | ||||||||
| Q1 2023 | 92.12 | 92.88 | 93.81 | 84.02 | 77.58 | 72.86 | ||||||||
| BSL--Broadly syndicated loan. CLO--Collateralized loan obligation. DG--Downgrade. | ||||||||||||||
As of March 2023, no reinvesting U.S. BSL CLOs were failing their O/C tests, while about 5% of amortizing U.S. BSL CLOs were failing one or more of junior O/C test. In a soon-to-be-published study, given current O/C test cushions, 'CCC' category exposures, and loan prices, we will explore the impact rising 'CCC' buckets and declines in loan prices have on CLO O/C test cushions, particularly across the various vintage cohorts listed in table 1 above.
For example, if all U.S. BSL CLO exposures to issuers rated 'B-' with a negative outlook were to experience a downgrade into the 'CCC' category, the proportion of U.S. BSL CLO exposures to 'CCC+' rated issuers and below would be roughly 10%. Also, if we assume the loans from these downgraded loan issuers experience a decline similar to the average decline in fourth-quarter 2022 (which saw a 10% decrease), we can quantify the impact to O/C test cushions for our sample of U.S. BSL CLOs. In the upcoming study, we explore the impact to all the O/C tests ('AA' through 'B') across both reinvesting and amortizing CLOs under different scenarios where exposures to 'CCC+' and below increase to 10%, 15%, 20%, and 25%. Under each of these scenarios, we modeled the O/C test cushion impact under various price decline assumptions for the downgraded collateral (loan price declines of 0%, 10%, 20%, 30%, 40%, and 50%).
As a sneak peak, see results under the 10% scenario with a 10% price decline below. Several amortizing and pre-pandemic reinvesting transactions fail under this scenario while no post-pandemic reinvesting transactions fail.
Chart 1
Chart 2
Top CLO Exposures Report Has An Interactive Dashboard Now!
S&P Global Ratings has updated its quarterly lists of the top companies with loan issuances held by U.S. BSL CLOs and the industry categories these companies operate within, both ranked on a dollar-weighted basis (see "U.S. BSL CLO Top Obligors And Industries Report: First-Quarter 2023," published April 24, 2023). The information is based on the most recent trustee reports available to us as of the end of first-quarter 2023.
Full details of the information are available through our interactive dashboard, by clicking here: https://www.spglobal.com/ratings/en/research-insights/sector-intelligence/interactives/u-s-bsl-clo-top-obligors-and-industries-report -q1-2023. The below image is a preview.
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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