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SF Credit Brief: CLO Insights: How Middle Market CLOs Are Faring During COVID; Second Quote Book Published

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CLO Insights 2020 Index And The Second Quote Book

We published our second Quote Book, which includes a list of corporate rating actions (September 27 through October 10) for issuers with loans held within U.S. broadly syndicated loan (BSL) collateralized loan obligations (CLOs) (please see "Quote Book: Gleaning Sector Trends For BSL CLO Market Participants (As Of Oct. 16, 2020)"). We also include a compilation of key quotes/paraphrases from the respective corporate rating action press releases, to provide insight on developing sector issues, from movie theatres to the RV industry. We note that the count of upgrades over the period is about the same (slightly greater) than the count of downgrades. As such, the metrics of the CLO Insights 2020 Index more or less held steady (or improved slightly) since our prior update two weeks ago.

Table 1

CLO Index Metrics (CLO Insights 2020 Index)
As of date 'B-' (%) 'CCC' category (%) Nonperforming category (%) Jr. O/C cushion (%) Weighted avg. price of portfolio SPWARF Par change (%) Watch negative (%) Negative outlook (%) Negative outlook or Watch negative (%)
Jan. 1, 2020 19.97 4.11 0.54 3.86 97.45 2644 0.00 1.63 17.36 19.00
Feb. 1, 2020 20.20 4.07 0.56 3.80 97.55 2645 (0.04) 1.33 17.66 18.79
March 1, 2020 20.16 4.13 0.63 3.76 95.83 2639 (0.07) 1.61 17.18 18.79
April 5, 2020 23.47 10.06 0.81 3.73 83.11 2857 (0.10) 10.71 24.37 35.08
May 3, 2020 25.40 12.31 1.61 2.38 86.73 2986 (0.23) 9.82 32.56 42.38
June 8, 2020 25.71 11.86 1.35 1.13 91.90 2960 (0.34) 8.42 36.34 44.76
July 6, 2020 24.82 11.41 1.53 1.39 91.14 2951 (0.39) 6.42 37.60 44.02
Aug. 2, 2020 24.35 10.66 1.57 1.48 92.60 2925 (0.55) 5.76 38.69 44.45
Sept. 7, 2020 24.36 10.10 1.39 1.56 94.41 2900 (0.66) 4.57 38.32 42.89
Sept. 27, 2020 24.39 9.55 1.53 1.69 94.33 2896 (0.69) 3.14 38.15 41.29
Oct. 6, 2020 24.84 9.35 1.35 1.76 94.12 2883 (0.69) 2.44 38.60 42.89
Oct. 11, 2020 24.83 9.28 1.38 1.78 94.46 2883 (0.70) 2.44 38.32 42.89
CLO--Collateralized loan obligation. O/C--Overcollateralization. SPWARF--S&P Global Ratings weighted average rating factor.

How Are Middle Market CLOs Faring During COVID (early March through the end of the third quarter)?

Table 2

Average Portfolio Metrics For Cohort Of S&P Global Ratings-Rated U.S. Middle Market CLOs
Start of March (%) End of third quarter (%) Change during COVID (%)
CCC bucket 10.33 19.50 9.17
Non-performing bucket 0.88 1.76 0.88
Not rated/not credit estimated (treated as CCC-; separate from CCC bucket above) 9.53 7.99 (1.54)
junior overcollateralization cushion 5.18 3.71 (1.47)
Par change 0.17
CLO--Collateralized loan obligation.

We reviewed portfolio metrics for a sample of about 70 S&P Global Ratings-rated reinvesting middle market U.S. CLOs. For our purposes here, we define middle market CLOs as those with a significant portion of credit estimated collateral, and these CLOs are separate from the BSL CLOs we track as part of our CLO Insights 2020 Index.

As a result of revised credit estimates and public rating actions between the start of COVID and the end of the third quarter, on average, 'CCC' buckets of these middle market CLOs increased by about 9% while non-performing (below 'CCC-') buckets increased by about 88 basis points, somewhat similar to what we saw across the CLO Insights 2020 index during COVID.

Par, on the other hand, was different. Excluding instances where a CLO had a senior note revolver and it paid down, the par balances (without haircuts) of these middle market CLO portfolios changed far less than their BSL CLO counterparts, experiencing a 17 basis points increase in par, on average, during this time period (as opposed to a decrease in par from the BSL index in the table above).

Given the 9% average increase in CCC's (both public ratings and credit estimates), many of the middle market CLOs are breaching their 'CCC' triggers and have exposure to non-performing assets. Despite the stable portfolio par balances, overcollateralization cushion for the junior tests have declined by over 1.4% on average, mainly due to overcollateralization haircuts (excess 'CCC' and non-performing). A small handful have failed their junior overcollateralization tests during COVID and resulted in senior note paydowns (one such reinvesting middle market CLO also paid down the senior notes from principal cash in the third quarter).

Related Research

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 (1) 212-438-8991;
stephen.anderberg@spglobal.com
Robert E Schulz, CFA, New York (1) 212-438-7808;
robert.schulz@spglobal.com
Secondary Contact:Deegant R Pandya, New York (1) 212-438-1289;
deegant.pandya@spglobal.com

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