Strong run helps CLOs shrug off Altice downgrade

Tom Davidson

Managing editor

It may be the largest triple C downgrade in years, but the CLO market is relatively unperturbed by Altice’s fall from grace.

The fact that the company was struggling with its debt burden was well known, but the saga took a new turn after comments by the Altice France CEO about a potential distressed exchange sent its debt spiralling. Moody’s and S&P followed with downgrades for Altice France to triple C by the end of March.

The impact will be material. Altice France is the largest name in the European CLO market, and the second largest issuer in US CLOs. (In the US the related but not yet downgraded Altice Financing adds even more exposure). But despite mainstream headlines proclaiming the end of the world, as the dust settles investors remain calm.

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Altice: debt spiral led to downgrades by Moody’s and S&P by the end of March

Dragoș Asaftei - stock.adobe.com

According to one European equity investor: “Of course we’re monitoring the situation, but its not that big a deal. CLOs are designed to deal with this.”

The situation is helped in Europe by the previously robust performance of the European loan market. According to a recent Barclay’s research paper: “Although EU CLOs have significantly more single-issuer concentration than US BSL CLOs, the impact of any single issuer being downgraded to Caa/CCC is limited in EU CLOs due to their relatively lower Caa/CCC buckets compared to the US. Caa buckets in EU CLOs were at 3.7% as of March 2024, while CCC buckets were 2.6%.”

But some deals will be impacted heavily. BNP Paribas’s David Nochimowski, head of global CLO & ABS Strategy says: “The immediate consequence for CLOs is the rise in CCC baskets. Altice France’s downgrade could result in 10% of Euro CLOs and 37% of US CLOs in aggregate breaching their CCC limit.”

The impact is more of a problem for the US market because triple C buckets there were already fuller. According to BNP Paribas estimates, the proportion of US CLOs failing their OC tests at the double B level could rise from roughly 6.4% before the Altice France downgrades to 8.0% — although manager actions should reduce that a little. If Altice Financing is also downgraded to triple C then the percentage of BB OC test breaches could rise to 8.6%.

Nochimowski also points to a less obvious impact. “For seasoned CLOs, the breach of some tests (such as CCC test, WARF test, OC test, etc...) could restrict further reinvestment activity, turning the deal into fully static mode,” he says. He estimates that 25% of all seasoned Euro CLOs and 32% of all seasoned US CLOs could become static.

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