October 2021 | Issue 239
Analysis
CLOs
Still plenty more fish in the triple C
Tanvi Gupta
Head of data journalism
Charlie Dinning
Data journalist
US CLO triple C buckets are lighter than a year ago thanks to the wave of loan upgrades from Moody’s and S&P. But 48% of downgraded paper is yet to return to a coveted single B rating
CLO triple C buckets have been getting lighter this year, with average exposure of 6% compared to 4% at the start of 2020 and 12% at the height of the coronavirus crisis last year, according to market sources.
Around a third of all CLO collateral was downgraded at some point last year, but nearly 75% of the triple C rating actions in 2021 have taken the form of an upgrade — which is the highest among speculative-grades rating categories, says Robert Schulz, managing director at S&P.
The impact of the 2020 downgrade wave was huge. 226 corporate debt issuers held by US CLOs were downgraded to triple C last year (after March) by either Moody’s or S&P. This impacted $75.63 billion of CLO portfolios at the time of the first downgrade. 200 of these issuers are still held across 1,396 US CLOs, making up $54.71 billion of CLO portfolios, according to CLO-i.
Of the $54.71 billion of loans downgraded to triple C last year, $21.98 billion (or 40.18%) have been upgraded out of triple C, while $6.64 billion were upgraded but stayed in triple C. $7.46 billion of CLO loans that were downgraded last year post-crisis were further downgraded this year.
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Largest upgrades out of triple C with manager exposure*
* Top 10 managers excluding those with all deals outside reinvestment period. Source CLO-i
Single Bs turned into triple Cs
One of the factors contributing to the large number of downgrades to triple C in 2020 was the dramatic rise in B-/B3 rated debt issuers, which lead to an increased number of Caa1/CCC+ loans during the downgrade wave. The downgrades to CCC+ were not due to near-term risk of default, but rather to unsustainable capital structures, S&P’s Schulz explains.
“This led to ‘round-trip issuers’ which were rated B- when the pandemic hit and their ebitda fell off, but then, when they and their sector recovered or they refinanced, they got upgraded back above triple C.”
The ratings of almost half the CLO loans that were downgraded remain unchanged: $26.27 billion (or 48.02%) of the loans in our data still have the rating they were downgraded to in 2020 by Moody’s or S&P.
On a panel at the Creditflux Symposium last month, Carlyle Group’s Lauren Basmadjian highlighted that we will continue to see upgrades from triple C. “There are some triple Cs that aren’t really triple Cs — they’re just laggards to be upgraded,” she said.
Ups take longer than downs
Schulz points out that recent upgrades are not at the same pace as the downgrades in 2020, which came in a six-to-eight-week period as the economy shut down. “Upgrades are idiosyncratic and driven by the economy and issuer behaviour. Sector dynamics are always important when looking at upgrades and even more so in this pandemic world,” he says.
The media: diversified & production sector benefitted most from upgrades as three out of four issuers — impacting $3.28 billion of CLO portfolios — recovered to single B levels. Technicolor is the sole issuer in this category to remain at triple C levels, but it was upgraded from CCC- to CCC+ by S&P.
“Some triple Cs aren’t really triple Cs”
Lauren Basmadjian | Carlyle Group
Christina Padgett, Moody’s head of leveraged finance research, points out that her firm’s rating actions are not sector focused. “Every rating has a committee look at the company. Industry is a part of it but our focus is company specific,” she says.
Despite differences in approach, sources say that 60-80% of the time ratings by both the agencies are the same. The timing of their rating changes may not align, but the agencies are looking at the same information to make their decisions.
“There is positive momentum”
Christina Padgett | Moody’s
Out of the $26.27 billion of CLO loans with unchanged ratings since a downgrade last year by either Moody’s or S&P, $1.45 billion was upgraded out of triple C by one and unchanged by the other agency, while $1.18 billion was downgraded further by one and unchanged by the other.
The economic outlook suggests there will be more upgrades out of triple C, says Moody’s Padgett. However, the pace will slow as we get closer to what are fundamentally vulnerable businesses. “But there is positive momentum,” she adds. “Most of the companies that are no longer on our distressed list have improved. In 2018 and before, you left the list because you defaulted.”
Methodology
- Rating agency action refers to Moody’s Corporate Family Rating and Standard & Poor’s Issuer Credit Rating being upgraded or downgraded.
- 2020 downgrades: corporate debt issuers that were downgraded to triple C or below from March onwards by either rating agency.
- Upgrades data: ratings as of 17 September for issuers downgraded to triple C or below last year.
Data
- Current holdings are as of most recent trustee report at time of writing, for all CLOs.
- Dataset is comprised of US CLOs (backed by broadly syndicated loans) and bond-flex CLOs.
- Data is sourced from CLO-i and Moody’s Analytics.
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Global credit funds & CLO's
October 2021 | Issue 239
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