A sharp dip in in the price of bonds issued by Altice France S.A. and Altice France Holding S.A. (together, Altice France) is unlikely to have significant knock-on effects for collateralized loan obligations (CLOs), despite the group's status as the largest individual issuer of debt to European CLOs rated by S&P Global Ratings. The potential for damage is cushioned because CLOs have no forced-sale mechanism, which would make them realize losses related to the market-value of the debt. All things being equal, even a default by Altice France, or a credit rating downgrade, would have limited repercussions for CLOs' performance.
What's Happening
On March 20, 2024, Altice France's unsecured bonds fell from above 70% of their notional amount to close to 20% after the company indicated it could discount the value of the debt to reduce its leverage to a new target of 4.0x.
Why It Matters
Altice France debt features in 98% of the European CLOs we rate, including 343 CLOs that hold Altice France SA instruments and 92 that hold Altice France Holdings SA debt. Total exposure to the two issuers is €1.61 billion across 345 CLOs (some CLOs hold debt from both issuers). The median exposure is about €4.5 million, while the maximum is just over €9.8 million.
Despite significant exposure, the impact of a theoretical Altice France default on CLOs (whilst not negligeable) shouldn't be a major concern, as things stand today. Even in a default scenario with 100% loss, our analysis finds that none of the CLO's senior overcollateralization ratios (OC ratios), which is one of the measures of the strength of a CLO tranche, will fail, although the cushion measured by the ratio reduces. At junior levels, we estimate that 27 OC ratios would fail across 20 CLOs, though mainly in amortizing CLOs, where positions are more concentrated.
In the event that Altice France is downgraded from 'B-' to 'CCC' the impact on CLOs would be notable, but still not massively disruptive (see table). That is largely because an increase in assets rated 'CCC' in a CLO does not trigger a forced sale. It does, however, force managers to consider the excess over the threshold (typically 7.5%) at a reduced notional amount in the OC ratios.
| Downgrading Altice France would increase the number of CLOs with excess over the 'CCC' threshold of 7.5% | ||||||
|---|---|---|---|---|---|---|
| Amortizing CLOs above 7.5% | Reinvesting CLOs above 7.5% | |||||
| Pre-downgrade | 4 | 1 | ||||
| Post-downgrade | 11 | 3 | ||||
| *Based on S&P Global Ratings credit ratings. | ||||||
What Comes Next
There is considerable uncertainty surrounding the potential actions of Altice France's board and the group's creditors. We believe Altice France will face challenges in achieving its 4.0x leverage target, and will likely have to rely on asset sales, operating performance recovery (which is currently lagging), and perhaps a debt write-off.
We expect some CLOs will adopt a risk-off posture and seek to reduce their exposure to Altice. That will be particularly the case if the risk of a credit rating downgrade or wider lack of clarity persists. Irrespective of the outcome with regards to Altice France, the situation is an illustration of the lack of creditor protection in some loan documents which:
- Don't prevent issuers moving assets beyond the reach of senior and junior creditors.
- Theoretically enable much, and perhaps all, of the proceeds from asset sales to be paid out as dividends.
- Can leave creditors worse off and place them in control of a diminished entity.
Related Research
- Weekly European CLO Update, March 19, 2024
- Altice USA Inc. Downgraded To 'B-' From 'B' On Lagging Credit Metric Turnaround; Outlook Stable, Feb. 21, 2024
- Altice France S.A.'s Note Issuance Supports Adequate Liquidity Profile, Jan. 12, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Emanuele Tamburrano, London + 44 20 7176 3825; emanuele.tamburrano@spglobal.com |
| Secondary Contacts: | Abhijit A Pawar, London + 44 20 7176 3774; abhijit.pawar@spglobal.com |
| Marta Stojanova, London (44) 79-6673-7531; marta.stojanova@spglobal.com | |
| Shane Ryan, London + 44 20 7176 3461; shane.ryan@spglobal.com |
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