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SF Credit Brief: CLO Insights 2024 U.S. BSL Index: Corporate Rating Upgrades Outpace Downgrades For The First Time In Almost Two Years; Defaults Tick Up Across CLO Portfolios

(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.)

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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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