articles Ratings /ratings/en/research/articles/240926-sf-credit-brief-clo-insights-u-s-bsl-index-a-look-back-at-clo-bond-exposures-august-downgrades-weigh-on-clo-13266726 content esgSubNav
In This List
COMMENTS

SF Credit Brief: CLO Insights U.S. BSL Index: A Look Back At CLO Bond Exposures; August Downgrades Weigh On CLO Metrics

COMMENTS

U.K. Corporate Securitization Issuers Can Withstand Higher Refinancing Rates

COMMENTS

French Covered Bond Market Insights 2024

COMMENTS

Weekly European CLO Update

COMMENTS

Non-QM Spotlight On Short-Term Rentals


SF Credit Brief: CLO Insights U.S. BSL Index: A Look Back At CLO Bond Exposures; August Downgrades Weigh On CLO Metrics

image

Since our last update (see "CLO Insights U.S. BSL Index: Slight Pickup In Some Junior O/C Cushions; Middle-Market CLO Manager Overlap By EBITDA," published Sept. 3, 2024, a handful of widely held issuers have experienced downgrades into the 'CCC' category or to a the nonperforming rating ('CC', 'SD', or 'D'), resulting in a modest deterioration in certain collateralized loan obligation (CLO) metrics (see "U.S. BSL CLO Obligors: Corporate Rating Actions Tracker 2024 (As Of Sept. 13)," published Sept. 20, 2024). Some loans from widely-held loan issuer Lumen Technologies are being held within broadly syndicated loan (BSL) CLO current-pay buckets in September trustee reports following a distressed exchange, particularly the senior loans, while other positions may be held as default assets. The average junior BSL CLO overcollateralization (O/C) test cushion has held steady at around 4% since May 2024, but may experience a slight decline in the near future due to recent corporate rating downgrades (see table 2).

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 (%)
Sept. 30, 2023(i) 28.59 6.66 0.46 2742 59.47 0.63 17.39 96.04 4.61 100.08 6.28
Oct. 31, 2023(i) 27.12 7.55 0.51 2757 59.53 0.94 17.77 95.27 4.56 100.03 5.76
Nov. 30, 2023(i) 26.71 7.22 0.40 2730 59.40 1.00 18.19 95.87 4.48 99.98 5.92
Dec. 31, 2023(i) 26.26 7.14 0.51 2719 59.74 0.93 17.94 96.79 4.45 99.95 5.61
Jan. 31, 2024(i) 26.11 6.50 0.92 2723 59.58 0.35 18.00 96.74 4.36 99.86 5.08
Feb. 29, 2024(i) 26.43 6.09 1.01 2723 59.57 0.53 16.66 97.24 4.23 99.78 5.15
March 31, 2024(i) 26.20 6.92 0.77 2724 59.29 0.66 16.21 97.41 4.18 99.74 5.04
April 30, 2024(i) 25.77 6.51 1.02 2733 59.00 0.93 15.99 97.08 4.10 99.67 4.81
May 31, 2024(i) 25.53 6.70 0.51 2696 59.31 0.95 15.69 97.21 99.57 4.93
June 30, 2024(ii) 25.40 6.37 0.41 2677 59.10 1.16 15.11 96.94 4.02 99.52 4.59
July 31, 2024(ii) 25.30 6.44 0.33 2666 59.05 0.98 15.20 97.03 4.02 99.46 4.40
Aug. 30, 2024(ii) 25.27 6.44 0.59 2684 58.70 1.15 14.89 97.02 3.97 99.40 3.94
Sept. 23, 2024(iii) 25.13 6.73 0.72 2700 58.43 1.24 15.09 97.02 3.96 99.39 3.88
(i)Index metrics based on end-of-month ratings and pricing data and as-of month portfolio data available. (ii)Iindex metrics based on Aug. 30, 2024, ratings and pricing data and latest portfolio data available to us. (iii)Index metrics based on Sept. 23, 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 To From Rank within U.S. BSL CLOs
Aug. 16, 2024 Gainwell Acquisition Corp. Health care technology CCC+/Negative B-/Negative Top 250
Aug. 19, 2024 Redstone Buyer LLC IT services CCC+/Stable B-/Negative 251-500
Aug. 26, 2024 Magenta Buyer LLC Software SD/-- CCC/Negative Top 250
Sept. 4, 2024 Level 3 Financing INC. Diversified telecommunication services CC/Negative CCC+/Stable Top 250
Sept. 4, 2024 Lumen Technologies Inc. Diversified telecommunication services CC/Negative CCC+/Stable Top 250
Sept. 5, 2024 Cobham ltra Seniorco S.A.R.L. Aerospace and defense B-/Watch Neg B-/Negative 251-500
Sept. 16, 2024 Pretium PKG Holdings Inc. Containers and packaging SD/-- CCC+/Stable 251-500
Sept. 20, 2024 Naked Juice LLC Beverages CCC+/Negative B-/Stable Top 250
GIC--Global industry classification. BSL CLO--Broadly syndicated loan collateralized loan obligation.

End Of An Era? Looking Back At Bonds U.S. BSL CLOs

Since interest rates started to climb in early 2022, some CLO managers have increasingly rotated a small portion of their portfolios into fixed-rate assets. Most U.S. BSL CLOs limit exposure to fixed rate assets to a modest amount, often 5%; and at the start of 2022, most collateral pools had no fixed-rate assets, and the average exposure across our rated transactions was near zero. Rising rates, however, shifted the calculus, and by the third quarter of 2024, fixed-rate assets made up 2% of overall U.S. BSL CLO assets.

The appeal of this to CLO managers in a rising rate environment is pretty straightforward. It enabled them to simultaneously build par while also potentially improving the rating profile of the portfolio, since many corporate bond issuers are rated higher than the average corporate loan issuer. Bonds from higher-rated issuers typically have lower coupons and will trade at a greater discount to par in a high-rate environment.

Most of the newly acquired bonds came from speculative-grade issuers, but about 18% of the current fixed-rate assets in our BSL CLOs are from investment-grade issuers. Given the influx of fixed-rate assets from higher-rated issuers, the weighted average coupon of fixed-rate assets in U.S. BSL CLO portfolios have declined to about 4.5%, from about 5.5% from early 2022, while par and credit quality of the acquiring CLOs has improved.

Chart 1

image

On Sept. 18, 2024, the Federal Reserve lowered interest rates by 50 basis points for the first time in four years. On the first few days that followed, there has been a very slight uptick in the average price of bonds that are held in US BSL CLO portfolios. Across the transactions we rate, we notice the larger managers were more likely to have larger exposure to fixed-rate assets in their portfolios; larger managers had about 2.2% exposure, while medium managers had about 1.7% and smaller managers had 1.5%.

Chart 2

image

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
Vijesh MV, Pune;
Vijesh.MV@spglobal.com
Secondary Contact:Deegant R Pandya, New York + 1 (212) 438 1289;
deegant.pandya@spglobal.com
Data Contributor:Ben Woodcock, London + 44 20 7176 3789;
ben.woodcock@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.

 

Create a free account to unlock the article.

Gain access to exclusive research, events and more.

Already have an account?    Sign in