(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.)
Corporate downgrades continue to outpace upgrades each month, but the count of corporate downgrades amongst U.S. broadly syndicated loan (BSL) collateralized loan obligation (CLO) obligors slowed in July 2023 to a recent low. Downgrades into the 'CCC' category slowed down in July, with only one obligor compared to 13 in June; and there has been a slight decline in 'B-', 'CCC' category, and nonperforming exposures in July. Despite the slight reduction in CLO exposure to obligors rated 'B-' and below, the proportion of U.S. BSL CLO obligors with a negative rating outlook continues to inch up slightly.
Loan prices have increased somewhat across CLO portfolios, with the average price across the index increasing to 95.3, the highest level over the past year. Junior overcollateralization (O/C) ratios and par balances continue to decline as June and July reports continue to get processed, although they still have (on average) a health cushion. Perhaps the plateauing of CLO 'CCC' buckets in July, combined with the increase in loan prices, may benefit BSL CLO junior O/C test cushions in the coming months.
Table 1
| CLO BSL Index metrics (CLO Insights 2022-2023 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 (%) | |||||||||||||
| July 31, 2022(i) | 29.36 | 3.49 | 0.25 | 2723 | 59.85 | 1.33 | 10.92 | 93.82 | 4.76 | 100.03 | 1.82 | |||||||||||||
| Aug. 31, 2022(i) | 29.77 | 3.59 | 0.50 | 2746 | 59.80 | 0.95 | 11.50 | 94.79 | 4.79 | 100.05 | 1.89 | |||||||||||||
| Sept. 30, 2022(i) | 29.55 | 3.77 | 0.45 | 2743 | 59.89 | 1.02 | 12.70 | 92.06 | 4.74 | 100.04 | 2.68 | |||||||||||||
| Oct. 31, 2022(i) | 29.52 | 4.45 | 0.32 | 2746 | 59.86 | 0.52 | 13.75 | 92.44 | 4.75 | 100.08 | 3.16 | |||||||||||||
| Nov. 30, 2022(i) | 30.43 | 4.48 | 0.27 | 2743 | 59.92 | 0.32 | 13.89 | 93.09 | 4.74 | 100.08 | 3.52 | |||||||||||||
| Dec. 31, 2022(i) | 30.44 | 4.91 | 0.42 | 2756 | 59.93 | 0.12 | 14.61 | 92.83 | 4.75 | 100.10 | 3.75 | |||||||||||||
| Jan. 31, 2023(i) | 30.52 | 5.12 | 0.39 | 2759 | 60.04 | 0.16 | 15.14 | 94.73 | 4.65 | 100.09 | 3.87 | |||||||||||||
| Feb. 28, 2023(i) | 30.88 | 4.78 | 0.61 | 2764 | 59.87 | 0.22 | 15.95 | 94.62 | 4.57 | 100.07 | 4.10 | |||||||||||||
| March 31, 2023(i) | 30.95 | 4.97 | 0.60 | 2761 | 59.69 | 0.32 | 16.37 | 93.93 | 4.47 | 100.07 | 4.22 | |||||||||||||
| April 30, 2023(i) | 31.10 | 5.42 | 0.63 | 2770 | 59.57 | 0.32 | 16.89 | 94.20 | 4.39 | 100.04 | 5.39 | |||||||||||||
| May 31, 2023(i) | 30.02 | 6.31 | 0.73 | 2789 | 59.40 | 0.52 | 16.18 | 93.31 | 4.24 | 99.95 | 4.71 | |||||||||||||
| June 30, 2023(ii) | 29.20 | 6.90 | 0.69 | 2781 | 59.41 | 0.48 | 16.07 | 94.81 | 4.11 | 99.90 | 4.81 | |||||||||||||
| July 21, 2023(iii) | 28.84 | 6.83 | 0.66 | 2773 | 59.14 | 0.31 | 16.73 | 95.30 | 4.10 | 99.89 | 5.43 | |||||||||||||
| (i)Index metrics based on end-of-month ratings and pricing data and as of month portfolio data available. (ii)Index metrics based on June 30, 2023, ratings and pricing data and latest portfolio data available to us. (iii)Index metrics based on July 21, 2023, 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
| U.S. BSL CLO obligor rating downgrades (2022-2023) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Total DG | DG to 'B-' | DG into 'CCC' category | DG to below 'CCC-' | |||||||
| Jul-22 | 16 | 7 | 4 | 1 | ||||||
| Aug-22 | 34 | 10 | 9 | 3 | ||||||
| Sep-22 | 37 | 14 | 9 | 3 | ||||||
| Oct-22 | 30 | 7 | 9 | 5 | ||||||
| Nov-22 | 30 | 7 | 6 | 2 | ||||||
| Dec-22 | 35 | 8 | 15 | 3 | ||||||
| Jan-23 | 18 | 3 | 4 | 1 | ||||||
| Feb-23 | 32 | 5 | 5 | 8 | ||||||
| Mar-23 | 48 | 13 | 7 | 13 | ||||||
| Apr-23 | 32 | 6 | 9 | 5 | ||||||
| May-23 | 42 | 8 | 13 | 10 | ||||||
| Jun-23 | 34 | 3 | 13 | 9 | ||||||
| Jul-23(i) | 14 | 3 | 1 | 5 | ||||||
| (i)Through July 21, 2023. BSL--Broadly syndicated loan. CLO--Collateralized loan obligation. DG--Downgrade. | ||||||||||
Table 3
| Notable downgrades across widely held U.S. BSL CLO obligors(i) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Rating | ||||||||||||
| Action date | Issuer name | GIC | Current | Previous | Rank within U.S. BSL CLOs | |||||||
| 6/5/2023 | Constant Contact Inc. | Software | B-/Stable | B/Negative | 251 to 500 | |||||||
| 6/6/2023 | Radiology Partners Holdings LLC | Health care providers and services | CCC+/Negative | B-/Negative | 251 to 500 | |||||||
| 6/9/2023 | WIN Waste Innovations Holdings Inc. | Electric utilities | CCC+/Negative | B/Negative | 251 to 500 | |||||||
| 6/23/2023 | VICTORS INTERMEDIATE HOLDING II CORPORATION | Building products | CCC+/Negative | B-/Stable | 251 to 500 | |||||||
| 6/26/2023 | Quest Software US Holdings Inc. | Software | CCC+/Stable | B-/Negative | Top 250 | |||||||
| 6/29/2023 | ADMI Corp. | Health care providers and services | B-/Stable | B/Negative | Top 250 | |||||||
| 6/29/2023 | BCPE NORTH STAR US HOLDCO 2, INC. | Food products | CCC+/Negative | B-/Negative | 251 to 500 | |||||||
| 6/29/2023 | SWF Holdings I Corp. | Household durables | CCC+/Negative | B-/Negative | 251 to 500 | |||||||
| 7/13/2023 | Project Alpha Intermediate Holding Inc. | Software | B-/Stable | B/Watch Neg | 251 to 500 | |||||||
| (i)Through July 21, 2023. GIC--Global industry classification. BSL CLO--Broadly syndicated loan collateralized loan obligation. D--Default. SD--Selective default. | ||||||||||||
O/C Test Cushions And Other Metrics Differentiate CLO Tranches With Ratings Lowered In 2020
Par balance and credit quality (amongst other things) are key factors of our credit analysis for surveillance of CLO ratings. To help illustrate how the CLO tranches that experienced a rating downgrade in 2020 compared with CLO tranches with a rating that was affirmed during the year, we looked at various metrics across these two cohorts of CLO notes.
Table 4
| Average CLO metrics across rating actions taken on reinvesting U.S. BSL CLOs in 2020 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average outlook negative exposure (%) | Average 'B-' exposure (%) | Average of 'CCC' category exposure (%) | Average nonperforming exposure (%) | Average trustee O/C ratio (%) | Average trustee O/C cushion (%) | Average SPWARF | Average O/C ratio (no 'CCC' haircut) (%) | Average subordination (no 'CCC' haircut) (%) | ||||||||||||
| 'BBB' affirmation | 38.21 | 24.39 | 11.83 | 1.61 | 110.64 | 2.58 | 2858 | 112.30 | 10.94 | |||||||||||
| 'BBB' downgrade | 41.05 | 24.67 | 12.45 | 2.29 | 108.60 | 0.57 | 2880 | 110.67 | 9.63 | |||||||||||
| 'BB' affirmation | 36.70 | 25.03 | 10.71 | 1.32 | 106.95 | 1.96 | 2838 | 108.10 | 7.48 | |||||||||||
| 'BB' downgrade | 39.68 | 24.26 | 12.34 | 1.89 | 104.59 | 0.34 | 2870 | 106.49 | 6.08 | |||||||||||
| 'B' affirmation | 36.02 | 24.35 | 11.26 | 1.46 | 105.35 | 2.42 | 2833 | 106.23 | 5.76 | |||||||||||
| 'B' downgrade | 39.09 | 24.22 | 12.01 | 2.21 | 102.20 | (0.39) | 2855 | 104.15 | 3.98 | |||||||||||
| BSL--Broadly ssyndicated loan. CLO--Collateralized loan obligation. O/C--Overcollateralization. SPWARF--S&P Global Ratings' weighted average rating factor. | ||||||||||||||||||||
In table 4, we compare various average metrics across downgraded and affirmed CLO notes originally rated within the 'BBB', 'BB', and 'B' rating categories. We find across all three rating categories, most of the credit metrics are worse across the CLO notes that were downgraded, versus the notes that were affirmed. We find the trustee-calculated O/C test cushions as well as the subordination levels of the CLO notes were notably different between the downgraded and affirmed notes. For example, the downgraded tranches across all three rating categories all had less than 1% average trustee O/C cushion at the time of downgrade, relative to the affirmed tranches, most of which had greater than 2% cushion, on average.
As of today, the average junior O/C cushion across our index of 549 reinvesting U.S. BSL CLOs hovers around 4.1% (see table 1); though, 29 transactions out of the index have less than 1% junior O/C cushion (of which three are currently failing). All but one of these transactions are pre-pandemic transactions (issued before March 2020) and experienced par loss as well as credit deterioration during the pandemic downturn in 2020. Across this cohort of 29 transactions with lower junior O/C cushions, we find par loss as the most common factor, with the average current portfolio par balance at 97.4% of target par balances at close, well below the average of 99.9% across the entire index. The average 'CCC' basket and exposure to nonperforming assets, on the other hand, are 7.7% and 1.0%, respectively (not as far off from the index averages of 6.8% and 0.7%).
U.S. BSL CLO Top Obligors And Industries Report: Second-Quarter 2023
S&P Global Ratings has updated its quarterly lists of the top companies with loan issuances held by U.S. broadly syndicated collateralized loan obligations (BSL CLOs) and the industry categories these companies operate within, both ranked on a dollar-weighted basis (see "CLO Spotlight: U.S. BSL CLO Top Obligors And Industries Report: Second-Quarter 2023," published July 19, 2023. The information is based on the most recent trustee reports available to us as of the end of second-quarter 2023.
Full details of the information are available through our interactive dashboard, by clicking here: https://www.spglobal.com/ratings/en/research-insights/sector-intelligence/interactives/us-bsl-clo-top-obligors-and-industries-report- q2-2023. The below image is a preview.
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.