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SF Credit Brief: CLO Insights U.S. BSL Index: New Issue Portfolios Versus Resets; Assets From ‘B’ Rated Companies Back on Top

(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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Over the past year, broadly syndicated loan (BSL) CLO managers have reduced exposure to 'B-' issuers, and a number of widely held 'B-' rated issuers have seen rating changes, with some downgraded into the 'CCC' category and others upgraded to 'B' or higher. After gradually declining 'B-' exposures for several quarters, 'B' rated obligors reclaimed the largest rating cohort by a small margin as of July 2024 (see chart 1). 'B' exposure was the largest cohort across U.S. BSL CLO portfolios for several years until 'B-' took over at the end of 2022.

A few issuers saw their ratings withdrawn in July, which, based on the way the metrics in our index are calculated, contributed to an increase in the July 2024 'CCC' exposure (see table 2 below). SRS Distribution Inc. saw its rating withdrawn after an acquisition and repayment of its debt, and Parfums Holding Co. Inc. had its rating withdrawn by issuer request after a refinancing. Unrated obligors are included within the 'CCC' bucket in table 1. As new trustee reports become available, updated portfolio exposures will be reflected in future updates.

Table 1

U.S. BSL CLO Index metrics
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 (%)
7/31/2023* 28.76 6.38 0.58 2754 59.54 0.31 16.83 95.50 4.59 100.12 5.40
8/31/2023* 28.60 6.77 0.51 2753 59.55 0.32 17.39 95.90 4.54 100.09 5.78
9/30/2023* 28.79 6.82 0.47 2752 59.39 0.62 17.55 96.01 4.54 100.08 6.34
10/31/2023* 27.34 7.69 0.52 2767 59.45 0.93 17.95 95.23 4.49 100.04 5.82
11/30/2023* 26.90 7.37 0.41 2740 59.33 1.01 18.34 95.84 4.41 99.97 5.98
12/31/2023* 26.46 7.29 0.52 2729 59.66 0.94 18.07 96.76 4.37 99.94 5.67
1/31/2024* 26.31 6.64 0.94 2733 59.50 0.34 18.17 96.71 4.29 99.85 5.15
2/29/2024* 26.64 6.21 1.04 2733 59.48 0.51 16.81 97.20 4.16 99.77 5.21
3/31/2024* 26.38 7.05 0.78 2732 59.21 0.65 16.33 97.38 4.11 99.72 5.11
4/30/2024* 25.95 6.63 1.04 2741 58.93 0.94 16.13 97.05 4.03 99.66 4.89
5/31/2024* 25.70 6.81 0.52 2703 59.25 0.95 15.80 97.20 3.90 99.56 5.01
6/30/2024** 25.48 6.68 0.42 2686 58.88 1.16 15.29 96.87 3.93 99.54 4.66
7/22/2024*** 25.23 7.26 0.38 2695 58.29 0.95 15.58 96.80 3.93 99.54 4.54
*index metrics based on end of month ratings and pricing data and as of month portfolio data available. **index metrics based on June 30, 2024, ratings and pricing data and latest portfolio data available to us. ***index metrics based on July 22, 2024, ratings and pricing data and latest portfolio data available to us.

Table 2

Notable downgrades across top 500 U.S. BSL CLO obligors
Rating
Action date Issuer name GIC To From Number rank
6/13/2024 Upstream Newco Inc. Health care providers and services CCC+/Negative B/Negative 251-500
6/17/2024 PAI Holdco Inc. Distributors CCC+/Negative B-/Negative 251-500
7/12/2024 Medical Solutions Parent Holdings Inc. Health care providers and services B-/Stable B/Stable 251-500
7/18/2024 CMG Media Corp. Media CCC+/Negative B-/Watch Neg Top 250

Chart 1

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New Issue CLOs And Resets Are Not The Same

Table 3

U.S. BSL CLO issuance average metrics at close
Quarter Closed New issue Reset
'B-' (%) 'CCC' bucket (%) Non-perform (%) SPWARF 'B-' (%) 'CCC' bucket (%) Non-perform (%) SPWARF
2023Q1 26.26 2.36 0.01 2560 N/A* N/A* N/A* N/A*
2023Q2 25.46 1.96 0.02 2534 N/A* N/A* N/A* N/A*
2023Q3 24.19 2.11 0.02 2523 24.44% 5.68 0.31 2647
2023Q4 24.36 2.22 0.04 2544 24.09% 5.80 0.59 2630
2024Q1 23.82 1.61 0.02 2497 25.77% 5.89 0.27 2649
2024Q2** 23.47 2.45 0.02 2516 23.84% 5.80 0.41 2636
*Sample size too small. **Some new issue/reset transactions have not issued their first trustee reports yet, based on latest data available to us as of July 1, 2024. SPWARF--S&P Global Ratings' weighted average rating factor.

Given the increase in CLO new issuance volume and CLO resets for U.S. BSL CLO transactions this year, we decided to compare new issue CLO and reset CLO portfolios for transactions closing over the past few quarters. We find many of the recent resets were from transactions that originally closed in 2020 through 2022. About half of the recently CLO reset transactions are from CLOs originated prior to the arrival of the pandemic in first-quarter 2020. Most of these transaction's portfolios experienced elevated levels of corporate rating downgrades over the past couple of years as interest rates increased sharply.

Some of these CLO resets may have had portfolios cleaned up ahead of the reset, as many of them had less than 6% 'CCC' exposure compared to the average reinvesting U.S. BSL CLO 'CCC' exposure of 6%-7% over the past year (see table 1 above). However, the new issue CLOs still have much cleaner portfolios, averaging around 2% 'CCC' exposure over the past few quarters. Average 'B-' exposures were fairly similar across the new issue and reset transactions that closed in recent quarters.

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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