This report is S&P Global Ratings' monthly summary update of U.S. BSL CLO Index's credit metrics and notable credit themes.
U.S. corporate rating actions were on a positive trajectory for the first half of 2022, but trended more negative in the second half of the year as economic headwinds increased. As a result, the trend of U.S. collateralized loan obligation (CLO) credit metrics gradually improving earlier in the year reversed course, and they started to see modest deterioration. The average broadly syndicated loan (BSL) CLO 'CCC' bucket started 2022 at 4.94% and reached a low point of 4.00% at the start of August; then, it reversed course and began creeping upward, to end the year at 5.23%. Most of the credit metrics in table 1 below ended the year in a slightly worse position than where they started. The exceptions are junior overcollateralization (O/C) test cushions and a gain in the par balance of the portfolios during 2022, both of which benefitted from manager trading when loan prices were below 95 for much of the latter part of the year.
Table 1
| CLO BSL Index Metrics (CLO Insights 2022 U.S. BSL Index)(i) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As of date | 'B-' (%) | 'CCC' category (%) | Nonperforming category (%) | SPWARF | WARR (%) | Watch negative (%) | Negative outlook (%) | Weighted avg. price of portfolio ($) | Jr. O/C cushion (%) | % of target par | Turnover (%) | |||||||||||||
| Jan. 2022 | 26.41 | 4.94 | 0.17 | 2700 | 60.44 | 0.88 | 12.33 | 98.79 | 4.37 | 99.68 | 0.00 | |||||||||||||
| Feb. 2022 | 27.16 | 4.27 | 0.37 | 2708 | 60.43 | 0.28 | 11.94 | 98.83 | 4.41 | 99.68 | 5.68 | |||||||||||||
| March 2022 | 27.09 | 4.26 | 0.39 | 2708 | 60.41 | 0.11 | 11.35 | 98.02 | 4.40 | 99.68 | 8.15 | |||||||||||||
| April 2022 | 27.44 | 4.17 | 0.13 | 2690 | 60.45 | 1.06 | 10.86 | 97.88 | 4.31 | 99.69 | 11.35 | |||||||||||||
| May 2022 | 27.76 | 4.26 | 0.14 | 2700 | 60.45 | 1.20 | 9.83 | 97.57 | 4.30 | 99.70 | 14.46 | |||||||||||||
| June 2022 | 27.70 | 4.14 | 0.20 | 2706 | 60.48 | 1.27 | 10.46 | 94.60 | 4.39 | 99.71 | 16.66 | |||||||||||||
| July 2022 | 28.59 | 4.01 | 0.35 | 2720 | 60.27 | 1.35 | 11.08 | 92.19 | 4.45 | 99.74 | 19.55 | |||||||||||||
| Aug. 2022 | 28.70 | 4.00 | 0.34 | 2726 | 60.32 | 1.46 | 11.53 | 93.81 | 4.47 | 99.78 | 21.86 | |||||||||||||
| Sept. 2022 | 29.00 | 4.21 | 0.59 | 2754 | 60.24 | 1.03 | 12.20 | 94.85 | 4.50 | 99.81 | 23.61 | |||||||||||||
| Oct. 2022 | 28.85 | 4.40 | 0.50 | 2751 | 60.16 | 1.16 | 13.36 | 92.12 | 4.50 | 99.82 | 25.58 | |||||||||||||
| Nov. 2022 | 28.85 | 5.02 | 0.40 | 2754 | 60.13 | 0.59 | 14.46 | 92.40 | 4.47 | 99.84 | 27.05 | |||||||||||||
| Dec. 2022 | 29.50 | 4.95 | 0.34 | 2749 | 60.15 | 0.32 | 14.62 | 93.08 | 4.44 | 99.85 | 28.39 | |||||||||||||
| Jan. 2023 | 30.03 | 5.23 | 0.50 | 2764 | 60.20 | 0.14 | 15.18 | 92.88 | 4.45 | 99.85 | 30.55 | |||||||||||||
| (i)Based off trustee reports dated within one month prior to being available to us at the start of each month. This index includes only 2021 vintage and prior transactions that have closed with CLO liabilities indexed to LIBOR (excludes 2022 vintage CLOs that would be indexed to SOFR). 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. SOFR--Secured overnight financing rate. | ||||||||||||||||||||||||
During the month of December:
- Fifteen obligors in U.S. BSL CLOs saw their corporate ratings lowered into the 'CCC' category, the highest monthly count in 2022, contributing to the increase in the CLO 'CCC' buckets to 5.23% from 4.95% the month before.
- Twelve of the 15 CLO obligors with ratings lowered into the 'CCC' category had been rated 'B-' before their downgrades, but despite this, 'B-' exposure increased to just over 30% during the month as another eight more widely held issuers were downgraded to 'B-' from 'B'.
- Corporate obligors in CLO collateral pools with a negative rating bias--that is, the sum of assets from obligors with ratings on CreditWatch negative and ratings with a negative outlook--crept up to 15.18%, up from 13.21% back in January 2022. We view negative ratings bias as an important forward-looking indicator of corporate credit quality.
Summary Of 2022 Negative Corporate Rating Actions
Across the portfolios within the index at the start of 2022, about 14% of assets (by par) experienced a rating downgrade in 2022 while about 10% experienced an upgrade. As noted in our corporate rating actions tracker, "U.S. BSL CLO Obligors: Corporate Rating Actions Tracker 2022," published Jan. 3, 2023, from August through November 2022, corporate rating downgrades outnumbered upgrades by about 2:1, before ending the year with a ratio of almost 4:1, mostly due to a low count of upgrades in December. From this list of 2022 actions, most of the corporate rating downgrades (roughly 3 out of 4) were one-notch downgrades. As seen in table 2, there were a notable count of 78 downgrades to 'B-' (mostly from 'B') and and 72 downgrades into the 'CCC' category (mostly from 'B-').
Table 2
| Summary Of 2022 Negative Corporate Rating Actions Taken on U.S. BSL CLO Obligors | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Downgrade count in 2022 | Negative rating bias placement count in 2022 | |||||||||||||||||||||
| Month in 2022 | Downgrade to 'B' or higher | Downgrade to 'B-' | Downgrade into 'CCC' category | Downgrade to non-performing rating | Downgrade within 'CCC' category | Downgrade within non-performing rating | Downgrade count total | CreditWatch negative placement | Outlook negative placement | Negative rating bias placement total | ||||||||||||
| Jan. | 1 | 4 | 1 | 1 | 3 | 1 | 11 | 2 | 2 | |||||||||||||
| Feb. | 2 | 2 | 4 | 1 | 9 | 7 | 3 | 10 | ||||||||||||||
| March | 5 | 3 | 3 | 3 | 1 | 15 | 3 | 6 | 9 | |||||||||||||
| April | 3 | 4 | 3 | 3 | 13 | 1 | 13 | 14 | ||||||||||||||
| May | 7 | 6 | 5 | 3 | 1 | 22 | 3 | 11 | 14 | |||||||||||||
| June | 3 | 7 | 3 | 4 | 2 | 19 | 18 | 18 | ||||||||||||||
| July | 2 | 7 | 4 | 1 | 1 | 1 | 16 | 1 | 17 | 18 | ||||||||||||
| Aug. | 3 | 10 | 9 | 3 | 5 | 4 | 34 | 1 | 18 | 19 | ||||||||||||
| Sept. | 9 | 14 | 9 | 3 | 2 | 37 | 2 | 30 | 32 | |||||||||||||
| Oct. | 4 | 7 | 9 | 5 | 4 | 1 | 30 | 4 | 18 | 22 | ||||||||||||
| Nov. | 9 | 7 | 6 | 2 | 4 | 2 | 30 | 3 | 25 | 28 | ||||||||||||
| Dec. | 3 | 8 | 15 | 3 | 5 | 1 | 35 | 1 | 23 | 24 | ||||||||||||
| Total | 48 | 78 | 72 | 29 | 33 | 11 | 271 | 26 | 184 | 210 | ||||||||||||
| BSL--Broadly syndicated loan. CLO--Collateralized loan obligation. | ||||||||||||||||||||||
To 'B-' Or Not To 'B-'? Taking a Closer Look At 'B-' Companies
The topic of 'B-' companies in CLO portfolios is one that's come up in nearly every recent conversation we've had with CLO investors and managers. This isn't surprising, since the proportion of 'B-' assets in BSL CLO portfolios is now at more than 30%, up from less than 13% at the end of 2017, and any downgrades to these ratings would, by definition, land these companies in the 'CCC' range (or worse). A majority of 'B-' ratings today are on companies that have been rated 'B-' from the start, rather than starting at a higher rating and getting to 'B-' by way of downgrade.
8.88% of the 'B-' exposures at the start of last year saw downgrades during the year. Of the roughly 26% overall 'B-' exposure in BSL CLO collateral pools (by par) at the start of 2022, about two-thirds (17% of assets) were originally rated 'B-', while around one-third (9%) were not originally rated 'B-'. We find the rating transitions across these two cohorts of 'B-' exposures behaved differently during the year, with the exposures to companies orginally rated 'B-' seeing fewer downgrades (see table 3). During 2022, less than 5% of the exposures to original 'B-' companies saw ratings lowered in 2022, compared with more than 16% for the exposures to companies that got to 'B-' at the start of 2022 by way of a downgrade.
We note 'CCC' exposures did not increase by 2.3% in 2022, evidence of manager intervention as CLO managers likely sold some of these exposures as they deteriorated during the year. We aim to cover the impact of CLO manager intervention in an upcoming update. By the end of 2022, the 'B-' exposure of this index increased to just over 30% from 26% at the start of the year, of which, about 20% were originally rated 'B-' while roughly 10% were not originally rated 'B-', maintaining a similar ratio of 2:1 from the start of 2022.
Table 3
| Proportion Of 'B-' Exposures Across CLO Index At Start Of 2022 (% Of CLO assets) | ||||||||
|---|---|---|---|---|---|---|---|---|
| % AUM at start of 2022 (a) | Downgraded in 2022 (% of AUM at start of 2022) (b) | Proportion downgraded in 2022 (b/a) | ||||||
| 'B-' original rating at start of 2022 | 17.29 | 0.84 | 4.86 | |||||
| Not original 'B-' rating at start of 2022 | 8.92 | 1.49 | 16.66 | |||||
| Total 'B-' at start of 2022 | 26.21 | 2.33 | 8.88 | |||||
| CLO--Collateralized loan obligation. AUM--Assets under management. | ||||||||
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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