CLO market’s favourite sector struggles as wages rise and leverage bites

Tom Davidson

Managing editor

The most important sector for the US CLO market is showing increasing signs of trouble. According to CLO-i data, healthcare and pharmaceuticals represents the largest exposure for US CLOs. More than 11% of loan names fall into that industry, representing some $92bn of total principal.

Experts have been sounding the alarm on healthcare for some time, but a spate of recent bankruptcies (see table) is flagging further trouble ahead. The largest chapter 11 bankruptcy in the sector is Air Methods Corp, an emergency medical transportation company, which is widely held by CLOs.

Healthcare is facing challenges internal and external, and regulatory. In the first category, the primary difficulty for companies is labour costs. A tight labour market has led to significant staffing shortages in the sector, and wage inflation is an ongoing challenge.

Source: Debtwire restructuring database

Regulatory challenges stem primarily from the No Surprises Act. This essentially prohibits providers from billing patients for balances that are the result of care being provided by an out-of-network provider without their prior knowledge.

The final challenge comes directly from the credit markets. Healthcare has been a long-term favourite for both leveraged loan and private credit lenders, and, as a result, companies in the sector have high leverage multiples.

According to a recent S&P research piece, the healthcare labour situation has improved slightly since 2022, with cost increases slowing to mid-single digits from the 9% rises seen last year. It expects ebitda margins for healthcare services to be flat to slightly improved in 2023.

But it cautions that margins for many providers will not return to pre-pandemic levels anytime soon. “Combined with the elevated interest rates and the negative working capital impacts of No Surprise Billing and Medicaid re-determinations, it is no wonder many highly leveraged healthcare companies are struggling to generate free cashflow,” says the report.

Share this article:

${prev-page}

${next-page}

Browse more Creditflux newsletters

Global credit funds & CLO's

November 2023 | Issue 259

Published in London & New York.