Distress rises in US CLO double Bs — but most have been in trouble for years

Tom Davidson

Managing editor

Poh-Heng Tan

Despite the limited impact of the Altice debacle on the European market (as explored in our cover story), stress is building in some older US CLOs. The robustness of the CLO 2.0 structure has carried the market through a variety of crises, but now a number of junior tranches in US BSL CLOs are either defaulted or impaired.

Leaving aside the rare single Bs, the simplest part of our analysis shows there are 11 US CLOs where the total notional collateral is insufficient to pay back the double B tranches in full. Of those 11 deals, eight are Halcyon CLOs from the 2012 through 2015 vintages. In those days Halcyon, now rebranded as Bardin Hill, was known in the market as an energy specialist, and its CLOs never recovered from the damage the oil crash of 2014-16 inflicted.

The other three are BNPP IP CLO 2014-II and Marathon CLO VII, both 2014 vintage deals, and Telos CLO 2013-3.

All those CLO BBs have been downgraded by the rating agencies over the past few years, many to defaulted levels. Others are now rated below triple C, and are considered likely candidates for a future default.

S&P Global Ratings’ Stephen Anderberg says: “While these tranches haven’t yet defaulted, they have experienced downgrades to their ratings due to significant credit deterioration, and the current ratings assigned reflect our view that it is unlikely the notes will get repaid in full by the CLOs’ legal final maturity dates.

“While the notes are undercollateralised (the balance of CLO notes at their level and senior exceeds the balance of the CLO’s performing assets, excluding equity), they are deferrable and it may be some time before a payment default occurs (typically when the CLO hits its final maturity date, or the assets are liquidated and the proceeds are insufficient to pay off the CLO notes in full).”

CLOs breaching junior OC tests (%)

Even before the Altice France downgrade, a number of other US CLOs were also in trouble. Apart from the 11 deals previously mentioned, 20 additional deals would experience impairment in their double B tranches under a scenario where: underlying assets with a credit spread-to-maturity of less than 1,200 basis points are considered at par value; the valuation of all other ‘distressed’ assets are based on their market prices as of 1 April 2024; and the value of equity or warrants is not included in the collateral valuation.

Since then, Altice has been tearing up calculations. In the US, research by BNP Paribas suggests that as many as 37.4% of US CLOs could now be breaching their CCC tests, up from 24.9% before Altice. If Altice Financing were also downgraded, that proportion could reach 40.5%. Similar impacts can be seen on US double B OC test breaches, which could rise above 8% if Altice Financing is downgraded.

Yet even after Altice, that band of 20 or so double B default candidates will need to see further distress to be tipped over the edge. In US BSL CLOs, Barclays pointed to a rise in single B assets as one potential danger in a recent research note. “Moody’s B3 assets have increased from 11% to 16% since the beginning of 2019, while S&P B- assets have risen similarly, from 15% to 27%,” it says. Despite that, within US BSL CLOs the individual single B exposures remain small, with even the highest only 0.38% for Athenahealth.

On the European side, even with Altice, triple C buckets still have headroom.

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