(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 |
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