(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.)
It's been a bumpy path, but downgrades to collateralized loan obligation (CLO) obligors have slowed, putting less pressure on broadly syndicated loan (BSL) CLO 'CCC' baskets. In October, only one widely held issuer (within the top 500 U.S. BSL CLO obligors) saw a downgrade into the 'CCC' range, while another saw its rating lowered to nonperforming (i.e., below 'CCC-'). Looking beyond the top 500 obligors, several companies with ratings lowered to nonperforming in the third quarter have since seen their ratings raised back into the 'CCC' range.
Since July, the average overcollateralization (O/C) test numerator haircut has declined somewhat across reinvesting transactions (see chart 1). Defaulted asset haircuts have declined notably since earlier this year and held steady since July despite the downgrade of widely held obligor, Lumen/Level 3, in early September. Across September and early October trustee reports, Lumen Technologies/Level 3 and Tosca Services exposure made up a large majority of current-pay buckets across CLO portfolios. Because Lumen/Level 3 and other exposures across several transactions were counted as current-pay assets, many CLOs did not experience a default haircut for those assets in O/C ratios. Meanwhile, haircuts from excess 'CCC' asset exposures declined in August and September, resulting in a decline in overall O/C test haircuts.
However, despite the decline in O/C test haircuts, O/C test cushions across our index of reinvesting CLO transactions still declined by 0.74% on average, to 3.84% from 4.58% a year ago. This was driven mostly by par loss of 0.71% across the portfolios over the same period (see table 1).
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 (%) |
Oct. 31, 2023(i) | 27.29 | 7.59 | 0.50 | 2760 | 59.51 | 0.95 | 17.78 | 95.27 | 4.58 | 100.07 | 5.78 |
Nov. 30, 2023(i) | 26.84 | 7.27 | 0.40 | 2734 | 59.38 | 1.02 | 18.19 | 95.87 | 4.51 | 100.02 | 5.94 |
Dec. 31, 2023(i) | 26.39 | 7.17 | 0.50 | 2722 | 59.71 | 0.95 | 17.94 | 96.79 | 4.47 | 99.98 | 5.63 |
Jan. 31, 2024(i) | 26.24 | 6.53 | 0.92 | 2726 | 59.55 | 0.36 | 18.01 | 96.74 | 4.39 | 99.90 | 5.11 |
Feb. 29, 2024(i) | 26.57 | 6.11 | 1.02 | 2727 | 59.54 | 0.53 | 16.69 | 97.23 | 4.26 | 99.83 | 5.18 |
March 31, 2024(i) | 26.34 | 6.93 | 0.77 | 2726 | 59.26 | 0.66 | 16.23 | 97.41 | 4.22 | 99.78 | 5.09 |
April 30, 2024(i) | 25.88 | 6.55 | 1.01 | 2735 | 58.97 | 0.93 | 16.05 | 97.07 | 4.12 | 99.71 | 4.87 |
May 31, 2024(i) | 25.60 | 6.74 | 0.52 | 2698 | 59.28 | 0.95 | 15.73 | 97.21 | 4.00 | 99.62 | 4.98 |
June 30, 2024(i) | 25.47 | 6.44 | 0.42 | 2681 | 59.09 | 1.16 | 15.16 | 96.93 | 4.03 | 99.57 | 4.62 |
July 31, 2024(i) | 25.36 | 6.52 | 0.34 | 2670 | 59.02 | 0.98 | 15.25 | 97.02 | 4.04 | 99.51 | 4.42 |
Aug. 30, 2024(i) | 25.33 | 6.48 | 0.59 | 2686 | 58.73 | 1.14 | 14.91 | 97.02 | 3.96 | 99.42 | 3.97 |
Sept. 30, 2024(ii) | 25.23 | 6.54 | 0.62 | 2690 | 58.80 | 1.46 | 15.12 | 97.11 | 3.84 | 99.36 | 4.02 |
Oct. 22, 2024(iii) | 25.14 | 6.65 | 0.65 | 2692 | 58.52 | 1.40 | 14.73 | 97.34 | 3.84 | 99.35 | 3.64 |
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 | |||||||
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. 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 | |||||||
Oct. 17, 2024 | CMG Media Corp. | Media | CC/Negative | CCC+/Negative | Top 250 | |||||||
Oct. 24, 2024 | VeriFone Systems Inc. | Electronic equipment, instruments, and components | CCC+/Negative | B-/Negative | Top 250 | |||||||
GIC--Global industry classification. BSL CLO--Broadly syndicated loan collateralized loan obligation. |
Chart 1
CLOs From Larger Managers Tend To Have More 'B-' Assets And More O/C Test Cushion Stability
We grouped U.S. BSL CLO managers by their post-pandemic issuance amounts into three groups, where group 1 managers issued the most transactions, group 2 managers issued a medium amount, and group 3 managers issued the least, if at all. When we review CLO performance across the three cohorts based on manager size, we find transactions from larger managers experienced a smaller decline in junior O/C test cushion over the past year (see chart 2).
The difference in the declines in O/C test cushion is less driven by the difference in O/C numerator haircuts, as the average 'CCC' bucket and defaulted asset exposure across the three cohorts of CLOs were fairly similar. Currently, 'CCC' buckets averaged between 6.2% and 6.9% across the three cohorts, while exposure to defaulted assets averaged between 0.6% and 0.7%. Rather, the difference in O/C cushion performances over the past year was mostly driven by differences in par loss across the three cohorts. The CLOs from group 1 managers experienced less par loss (-0.62%) over the time period, while transactions from the smaller group 2 and 3 managers saw greater par loss (-0.95% and -0.96%, respectively).
Chart 2
De-risking efforts by collateral managers can be part of the reason for the difference in par loss and reduction in O/C test cushions. One potential reason is in the decline in average 'B-' exposure. After reaching a peak of about 31% around second quarter of 2023, average BSL CLO 'B-' asset exposure has declined steadily to about 25%. However, some transactions have de-risked away from 'B-' at a greater pace. By the start of fourth-quarter 2024, 'B-' asset exposure across transactions from the three cohorts are:
- Group 1 managers averaged 25.7%;
- Group 2 managers averaged 24.1%; and
- Group 3 managers averaged 21.6%.
Potentially, sales of weaker 'B-' exposures at a discount may have been due to a fear of greater loss from potential liability management exercises (LMEs) or conventional defaults. Also, transactions from smaller managers tend to have less obligor diversity, resulting in higher O/C test cushion volatility when a larger position is sold at less than par or is downgraded into the 'CCC' range and pushes it above the 7.5% threshold.
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 |
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.