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SF Credit Brief: CLO Insights 2023 U.S. BSL Index: CLO Metrics Tick Lower, And We Assess The Benefits Of Active CLO Management

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SF Credit Brief: CLO Insights 2023 U.S. BSL Index: CLO Metrics Tick Lower, And We Assess The Benefits Of Active CLO Management

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After a small flurry of negative rating actions on CLO obligors in late October and November (downgrades to 'B-', into the 'CCC' rating category, and in some cases, to non-performing ratings; see table 2 below), average 'CCC' exposure across our index of rated reinvesting U.S. broadly syndicated (BSL) collateralized loan obligation (CLO) is now 7.84%, slightly above the 7.5% threshold for the first time since the second quarter of 2021. We note that excess 'CCC' haircuts are starting to impact CLO junior overcollateralization (O/C) test cushions, along with defaulted asset haircuts (see slide 38 from "SLIDES: U.S. BSL CLO And Leveraged Finance Update: Elevated Rates Expected To Keep Pressure On Low-Rated Corporates," published Nov. 3, 2023). We have observed some CLO managers de-risking their portfolios, particularly in the second and third quarters of this year, resulting in par loss, as noted in the 32-basis-point (bps) decline in par balance across our index over the past year. Between the O/C numerator haircuts and the par loss, the average junior O/C test cushion has declined by 79 bps to a still respectable 4.06%. Across CLO transactions in the index, about 2.5% are passing with less than 1% cushion, while 1.2% of our index are failing their junior O/C test (most of which are across the pre-pandemic transactions).

Table 1

CLO BSL Index metrics (CLO Insights 2022-2023 U.S. BSL Index)
As of date '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 (%)
Nov. 30, 2022(i) 30.43 4.31 0.25 2738 59.92 13.79 0.32 93.15 4.95 100.23 3.51
Dec. 31, 2022(i) 30.45 4.72 0.39 2751 59.94 14.46 0.12 92.89 4.95 100.24 3.74
Jan. 31, 2023(i) 30.55 4.94 0.37 2754 60.04 14.92 0.16 94.80 4.86 100.24 3.85
Feb. 28, 2023(i) 30.88 4.64 0.56 2759 59.87 15.79 0.22 94.68 4.78 100.21 4.07
March 31, 2023(i) 30.94 4.85 0.55 2756 59.70 16.21 0.32 93.99 4.70 100.22 4.17
April 30, 2023(i) 31.12 5.29 0.58 2764 59.59 16.72 0.32 94.26 4.63 100.20 5.35
May 31, 2023(i) 30.03 6.19 0.67 2782 59.42 16.05 0.52 93.37 4.49 100.11 4.68
June 30, 2023(i) 29.22 6.73 0.63 2773 59.45 15.88 0.46 94.87 4.35 100.06 4.75
July 31, 2023(i) 28.66 6.52 0.68 2763 59.37 16.55 0.32 95.37 4.27 100.01 5.39
Aug. 31, 2023(i) 28.54 6.96 0.59 2762 59.89 17.20 0.33 95.77 4.21 99.98 5.82
Sept. 30, 2023(ii) 28.67 7.02 0.55 2760 59.29 17.36 0.62 95.90 4.21 99.96 6.20
Oct. 31, 2023(ii) 27.27 7.85 0.60 2775 59.34 17.95 0.94 95.15 4.17 99.92 5.87
Nov. 17, 2023(iii) 27.17 7.84 0.58 2772 59.31 17.99 0.95 95.28 4.16 99.91 5.91
(i)Index metrics based on end-of-month ratings and pricing data and as-of-month portfolio data available. (ii)Index metrics based on Oct. 31, 2023, ratings and pricing data and latest portfolio data available to S&P Global Ratings. (iii)Index metrics based on Nov. 17, 2023, ratings and pricing data and latest portfolio data available to S&P Global Ratings.

Table 2

Notable downgrades across top 500 U.S. BSL CLO obligors
Rating
Action date Issuer name GIC Current Previous Rank within U.S. BSL CLOs
Oct. 4, 2023 Pretium PKG Holdings Inc. Containers and packaging SD/-- CCC+/Negative 251 to 500
Oct. 5, 2023 Michaels Cos. Inc. (The) Specialty retail CCC+/Negative B-/Negative Top 250
Oct. 18, 2023 OceanKey (U.S.) II Corp. Software B-/Stable B/Negative 251 to 500
Oct. 24, 2023 Iris Holding Inc. Chemicals CCC+/Stable B-/Stable 251 to 500
Oct. 26, 2023 Air Methods Corp. Health care providers and services D/-- CCC/Negative 251 to 500
Oct. 28, 2023 EyeCare Partners LLC Health care providers and services CCC/Negative B-/Negative Top 250
Nov. 11, 2023 Telesat Canada Diversified telecommunication services SD CCC+/Negative 251 to 500
Nov. 15, 2023 WCG Purchaser Corp. Life sciences tools and services B-/Stable B/Negative Top 250
Nov. 20, 2023 FinThrive Software Intermediate Holdings Inc. Health care technology SD/-- CCC+/Negative 251 to 500
Nov. 21, 2023 CommScope Inc. Communications equipment CCC/Negative B-/Watch Neg Top 250
GIC--Global industry classification. BSL CLO--Broadly syndicated loan collateralized loan obligation. SD--Selective default.

Assessing The Benefits Of Active Management During Uncertain Economic Times

Over the past year-and-a-half, interest rates have gone through steep increases and economic growth has slowed, which put pressure on the highly levered, speculative-grade-rated corporate borrowers that issue most of the loans inside U.S. CLO collateral pools. Given the economic uncertainty and a gradual deterioration of U.S. BSL CLO credit metrics over the past 18 months, we are now taking stock of how active management of collateral has affected CLO performance. The study presented in our article, "Managers Matter: Active Management Of U.S. BSL CLOs During Uncertain Times Shows Its Value," published today, builds on similar studies we have done previously to assess the value of active management during previous periods of stress, including the Global Financial Crisis; the oil, gas, and commodities slowdown in 2015 and 2016; and the 2020 pandemic.

In summary:

  • We performed a study assessing the impact of active management in the post-pandemic era, focusing on a seven-quarter period from the start of 2022 through third-quarter 2023.
  • We found that without active management, some CLO metrics could have deteriorated to levels not seen since the pandemic, including some 'CCC' buckets going to over 12%.
  • Higher assets-under-management managers experienced more stability as they maintained higher exposure to large obligors and were more likely to purchase fixed-rate assets at a discount.

Our sample experienced portfolio turnover of about 48% during this seven-quarter period, though there was some variance across the sub-cohorts (by vintage and manager size). If we were to again enter a period of economic stress similar to what we saw in 2020, the trades done by some managers between first-quarter 2022 and third-quarter 2023 may have been enough to save their junior CLO tranches from a downgrade.

Table 3

Average sample turnover between first-quarter 2022 and third-quarter 2023
Vintage cohort
Manager group Pre-pandemic (%) Post-pandemic (%) Total (%)
Group 1 48.72 47.22 47.87
Group 2 49.92 48.20 48.96
Group 3 49.75 47.74 48.57
Total 49.03 47.44 48.13

Appendix

The U.S. CLO Insights Index averages CLO portfolio metrics across a large sample of S&P Global Ratings-rated U.S. BSL CLO portfolios that have been reinvesting for the prior one-year period (13 months from start to end), where:

  • We have fully processed trustee report information for the first 11 months of the one-year period;
  • The credit ratings (including outlook and CreditWatch data), recovery ratings, and loan price values of the portfolio exposures are set to end-of-month values for each of the first 11 months;
  • Data for in-progress months (i.e., the last two months within the one-year period; 13 months from start to end) are based off the latest processed trustee report information per month, where the ratings (including outlook and CreditWatch), recovery ratings, and loan prices values of the portfolio exposures are set to the date indicated within the in-progress months; and
  • Transactions that exit the reinvestment period during the one-year period, transactions that become effective during the one-year start-to-end period, or transactions where we do not have complete portfolio information processed across the first 11 months of the one-year period are excluded from this index.

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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