(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.)
Since late January 2024, U.S. broadly syndicated loan (BSL) collateralized loan obligation (CLO) portfolios have seen downgrades across several widely held obligors. Lumen Technologies Inc. (aka LEVEL 3 Financing) and Radiology Partners Holdings LLC, both among the top 500 BSL CLO obligors, saw ratings lowered to 'CC' in late January, and the rating on Radiology Partners was subsequently lowered to 'SD' on Feb. 26, 2024, after a debt modification transaction. Average BSL CLO exposure to non-performing assets has increased to 1.22%, from 0.54% at the start of the year.
The impact of the recent defaults hasn't shown up yet in junior overcollateralization (O/C) test cushions, but these have already declined notably over the past year, mostly due to haircuts from previous defaults. Given these recent actions, cushions may decline further for some transactions until ratings are raised post-debt modifications (see "U.S. BSL CLO Obligors: Corporate Rating Actions Tracker 2024 (As Of Feb. 16)," published Feb. 21, 2024).
It's worth noting junior O/C test cushions, currently at 4.15%, are still at healthy levels relative to historical levels.
Table 1
CLO BSL Index metrics (CLO Insights 2023-2024 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 (%) | |||||||||||||
Feb. 28, 2023(i) | 30.89 | 4.56 | 0.52 | 2757 | 59.92 | 0.21 | 15.63 | 94.75 | 4.94 | 100.32 | 4.00 | |||||||||||||
March 31, 2023(i) | 30.96 | 4.78 | 0.52 | 2753 | 59.76 | 0.32 | 16.05 | 94.07 | 4.86 | 100.33 | 4.10 | |||||||||||||
April 30, 2023(i) | 31.15 | 5.21 | 0.54 | 2761 | 59.65 | 0.33 | 16.57 | 94.34 | 4.80 | 100.31 | 5.28 | |||||||||||||
May 31, 2023(i) | 30.06 | 6.12 | 0.62 | 2779 | 59.48 | 0.51 | 15.92 | 93.44 | 4.67 | 100.22 | 4.61 | |||||||||||||
June 30, 2023(i) | 29.22 | 6.67 | 0.59 | 2770 | 59.87 | 0.46 | 15.78 | 94.94 | 4.53 | 100.17 | 4.70 | |||||||||||||
July 31, 2023(i) | 28.62 | 6.49 | 0.64 | 2760 | 59.43 | 0.31 | 16.47 | 95.43 | 4.44 | 100.12 | 5.34 | |||||||||||||
Aug. 31, 2023(i) | 28.49 | 6.90 | 0.56 | 2758 | 59.45 | 0.33 | 17.11 | 95.83 | 4.39 | 100.10 | 5.75 | |||||||||||||
Sept. 30, 2023(i) | 28.64 | 6.97 | 0.52 | 2757 | 59.31 | 0.62 | 17.27 | 95.95 | 4.39 | 100.08 | 6.15 | |||||||||||||
Oct. 13, 2023(i) | 27.18 | 7.82 | 0.56 | 2771 | 59.36 | 0.94 | 17.82 | 95.18 | 4.34 | 100.03 | 5.80 | |||||||||||||
Nov. 30, 2023(i) | 26.77 | 7.49 | 0.43 | 2743 | 59.27 | 1.01 | 18.21 | 95.79 | 4.25 | 99.95 | 5.94 | |||||||||||||
Dec. 31, 2023(i) | 26.34 | 7.41 | 0.54 | 2732 | 59.59 | 0.94 | 17.82 | 96.70 | 4.21 | 99.92 | 5.70 | |||||||||||||
Jan. 22, 2024(ii) | 26.23 | 6.73 | 1.00 | 2738 | 59.24 | 0.33 | 17.74 | 96.65 | 4.15 | 99.85 | 5.17 | |||||||||||||
Feb. 20, 2024(iii) | 26.33 | 6.49 | 1.22 | 2748 | 59.05 | 0.24 | 17.69 | 96.60 | 4.15 | 99.85 | 5.36 | |||||||||||||
(i)Index metrics based on end of month ratings and pricing data and as of month portfolio data available. (ii)Index metrics based on Jan. 31, 2024, ratings and pricing data and latest portfolio data available to us. (iii)Index metrics based on Feb. 20, 2024, ratings and pricing data and latest portfolio data available to us. 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. |
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 | |||||||
Feb. 9, 2024 | CMG Media Corp. | Media | B-/Negative | B/Negative | Top 250 | |||||||
Jan. 31, 2024 | Level 3 Financing Inc. | Diversified telecommunication services | CC/Negative | CCC+/Watch Neg | Top 250 | |||||||
Jan. 31, 2024 | Lumen Technologies Inc. | Diversified telecommunication services | CC/Negative | CCC+/Watch Neg | Top 250 | |||||||
Jan. 26, 2024 | Radiology Partners Inc. | Health care providers and services | CC/Negative | CCC+/Watch Neg | 251 to 500 | |||||||
Jan. 12, 2024 | GoTo Group Inc. | Software | CCC+/Negative | B-/Negative | Top 250 | |||||||
GIC--Global industry classification. BSL CLO--Broadly syndicated loan collateralized loan obligation. D--Default. SD--Selective default. |
Corporate Ratings: The Rationales Behind The Actions
Over the past year, corporate rating downgrades outpaced upgrades every month, with over 100 obligors in U.S. BSL CLOs seeing ratings lowered into the 'CCC' category. To see if there were any trends worth noting, we reviewed the rating action press releases and categorized the key rationale and secondary rationales for each 2023 downgrade.
Some of our observations include:
- The key rationale for the 141 companies with ratings lowered into the 'CCC' category in 2023 were issues related to cash flow/leverage and liquidity.
- A large majority of downgrades with a cash flow/leverage rationale were due to concerns over an unsustainable capital structure.
- Downgrades with a liquidity rationale were split across concerns over high risk of payment default, near-term maturity, and cash flow shortfalls.
- The key rationales for downgrades to the non-performing rating category were defaults, with distressed exchange making up a large majority of these defaults.
Table 3
2023 speculative-grade downgrades across U.S. BSL CLO obligors (no.) | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Key rationale | Secondary rationale | 'BB' category | 'B' category | 'CCC' category | Non-performing category | Speculative-grade total | ||||||||
Cash flow/leverage | ||||||||||||||
(Un)sustainable cap structure | 56 | 56 | ||||||||||||
M&A-driven credit measure weakness | 1 | 1 | ||||||||||||
Weaker than expected cash flow/leverage | 13 | 61 | 2 | 76 | ||||||||||
Competitive position | ||||||||||||||
Competition/market share losses | 1 | 1 | ||||||||||||
Regulatory | 1 | 1 | ||||||||||||
Secular pressure (changes)/industry challenges | 1 | 1 | 2 | |||||||||||
Default | ||||||||||||||
Bankruptcy | 18 | 18 | ||||||||||||
Covenant breach | 2 | 2 | ||||||||||||
Distressed exchange | 48 | 48 | ||||||||||||
Payment default | 25 | 25 | ||||||||||||
Liquidity | ||||||||||||||
High risk of payment default (interest, principal) | 1 | 24 | 25 | |||||||||||
Near-term maturity | 10 | 23 | 33 | |||||||||||
Persistent cash flow shortfalls | 5 | 34 | 39 | |||||||||||
Risk of covenant breach | 2 | 2 | 4 | |||||||||||
Operating performance | ||||||||||||||
Cost pressure (inability to pass thru cost)/inflation | 5 | 5 | ||||||||||||
Margin decline/market share loss | 1 | 11 | 12 | |||||||||||
Revenue decline | 7 | 16 | 23 | |||||||||||
Total | 23 | 114 | 141 | 93 | 371 | |||||||||
BSL CLO--Broadly syndicated loan collateralized loan obligation. |
Corporate Upgrades (Slightly) Outnumber Downgrades In January
January 2024 saw corporate rating upgrades outnumber downgrades for the first time in almost two years by the narrowest of margins: 19 upgrades during the month against 18 downgrades. Using the same key rationale and secondary rationale framework from above, we looked at corporate rating actions taken in 2024 thru February 16. Across the upgrades year to date, the top three key rationales were stronger-than-expected improvements in cash flow/leverage, the extension of debt maturities, and the completion of distressed exchanges. For downgrades, key rationales included concerns related to cash flows and leverage, and defaults for the actions taken so far.
Table 4
U.S. CLO obligor 2024 upgrade and downgrade rationales (no.) | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Downgrade/upgrade | Key rationale | Secondary rtionale | Jan. | Feb. (through 16th) | 2024 total | |||||||
DG | Cash flow/leverage | Weaker-than-expected cash flow/leverage | 4 | 3 | 7 | |||||||
DG | Default | Bankruptcy | 1 | 2 | 3 | |||||||
DG | Default | Payment default | 1 | 1 | 2 | |||||||
DG | Default | Distress exchange | 9 | 4 | 13 | |||||||
DG | Liquidity | High risk of payment default (interest, principal) | 1 | 1 | ||||||||
DG | Liquidity | Persistent cash flow shortfalls | 2 | 1 | 3 | |||||||
DG | Operating performance | Revenue decline | 1 | 1 | 2 | |||||||
DG | Operating performance | Cost pessure (inability to pass through cost)/inflation | 1 | 1 | ||||||||
UG | Cash flow/leverage | Stronger-than-expected improvement in cash flow/leverage | 6 | 3 | 9 | |||||||
UG | Cash flow/leverage | M&A-driven improvements | 1 | 1 | ||||||||
UG | Corporate governance | Lower risk tolerance | 1 | 1 | ||||||||
UG | Default | Emergence | 1 | 1 | ||||||||
UG | Default | Completion of exchange | 5 | 2 | 7 | |||||||
UG | Liquidity | Extension of debt maturities | 6 | 6 | ||||||||
UG | Liquidity | Cash inflows (asset sale, equity contribution, new funding) | 1 | 1 | ||||||||
UG | Operating performance | Solid revenue growth | 3 | 3 | ||||||||
UG | Operating performance | Improving margins and market share | 1 | 1 | ||||||||
DG--Downgrade. UG--Upgrade. BSL CLO--Broadly syndicated loan collateralized loan obligation. |
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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