Global credit funds & CLO's
April 2020
| Issue 222
Published in London & New York.
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April 2020 | Issue 222
Analysis CLOs
We’ve survived before, we can do so again
Charlie Dinning
Data journalist
$7.8 billion of CLO collateral, split evenly between the US and Europe, is in the loans that have fallen fastest in the past month. But short term CLO pain will bring opportunities for building par
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Oil and gas causes damage in US
Various industries are causing the most immediate damage across US and European markets. In the US, $1.8 billion of the $3.7 billion volatile loans held in US CLOs are from the oil and gas industry, thanks to seven of the worst performing 20 loans being in this sector. 60% of this is from two companies — McDermott International and Tallgrass Energy.

Among the most vulnerable loans, McDermott is the issuer most held in US CLOs, with $645 million. The company has faced a plethora of problems recently after it filed for bankruptcy on 21 January. At the end of February, the average bid on both its October 2019 term loan and April 2018 term loan B was 57.9. They have since fallen to 37.6, a drop of 35.1%.

Tallgrass loans have also slumped by about 35%, from 96.6 to 62.5, affecting the $467 million of the loan that is in US CLOs.
Total US leveraged loan outflows in past eight weeks
Entertainment hurts European CLOs
In Europe, the entertainment and leisure industry is the source of the most problems, with €2 billion of the €3.8 billion vulnerable loans in this sector. Hotelbeds loans account for €755 million across the European CLO market and the issuer has the three European loans that have decreased in value the most since the end of February. Hotelbeds’ April 2019 incremental term loan C has dropped from 96.3 on 28 February to 66.3 on 20 March, a fall of 31.1%. Its May 2017 term loan B has not done much better, dropping 31%, and its July 2016 term loan B has fallen 27.1%. European CLO managers have €590 million and €385 million of exposure in GVC Holdings and Vue International in the entertainment and leisure industry, which have dropped 19.2% and 26.9%, respectively. PGIM is the largest holder of Hotelbeds’ loans with €100 million across 16 of its deals. GSO Capital Partners has the second largest exposure to all three of Hotelbeds’ loans with €84 million held, and Investcorp has the third most across its CLOs, at €80 million. But it is Sound Point Capital Management’s debut European CLO that has the highest exposure to Hotelbeds’ worst performing loan. Sound Point Euro I has €7.5 million of the issuer’s incremental term loan C, according to its February trustee report. GSO is the European CLO manager with the most exposure to all of the 20 European loans that have dropped the most. The global manager has €316.5 million of these loans across its CLO platform with €167 million of that concentrated in Hotelbeds and Starfruit. It holds €85 million of each issuer. PGIM has the second most at €309 million and Alcentra slots in third with €228 million of exposure to the top 20 loan decliners. But Alcentra’s transaction Jubilee 2017-XIX has the greatest amount concentrated in one European portfolio with €27.5 million of the loans.
Amount of declining loans in Europe in entertainment sector
GoldenTree deal has most exposure
Most of these managers have spread this risk out across CLOs. The CLO with the greatest exposure to these 20 loans is GoldenTree Credit Opportunities 2012-1, which has over $60 million of these troubled loans in its portfolio, making up 10.35% of the CLO. On top of this, as of the deal’s February trustee report, the CLO is failing its triple C bucket threshold. GoldenTree Credit Opportunities 2012-1 is allowed to invest 17.5% of its portfolio in triple C rated loans, but its current triple C exposure is 22%.
US S&P/LSTA loan index
European S&P/LSTA loan index
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Seven of the 20 worst performing loans in the US are from oil and gas companies
Financial markets have been brought to their knees in a manner not seen since 2008 as leveraged loan prices have fallen to the low 80s. The rapid decline in loan prices in March is testing all CLO managers, making the 2015/2016 oil crisis and 2018 retail fund outflows feel like mere bumps in the road. US CLOs have $3.7 billion of exposure to the 20 US loans for which the average bid price has declined the most since the end of February, while European CLOs hold €3.8 billion of the 20 European loans that have suffered the greatest declines, according to the most recent trustee reports across the CLO universe. The S&P/LSTA Leveraged Loan Index dropped below 80 on 19 March, the first time this has happened since the global financial crisis of 2008. On top of this, leveraged loan outflows have totalled $9 billion over the past eight weeks, including $2.6 billion in outflows during the week starting 16 March.

Mercifully, CLOs are not mark to market vehicles, which means they should be able to build par during the dislocation, just as they did in the aftermath of the financial crisis a dozen years ago.
Source: IHS Markit, Debtwire
California resources 8/16
California Resource loan falls fastest
In the US market, the loan that has experienced the greatest drop in price during the coronavirus-induced turmoil has been California Resource’s August 2016 term loan. The average bid on the loan on 28 February was 50.4, but three weeks later that had dropped to just 12.4 — a decrease of 75.4%. However, CLO managers did not have much exposure to the term loan, with only $6.3 million of it in US CLOs across two managers — BlackRock and Palmer Square Capital Management, according to the most recent trustee reports. BlackRock is holding $5.7 million of this across six of its CLOs, with Magnetite VIII holding the most exposure to the loan at just $1.45 million. Palmer Square has only $545,000 in its bond-flex CLO Palmer Square Credit Funding 2019-1. The CLO manager that holds the most amount of the 20 worst performing loans is MJX Asset Management. Across 28 CLOs, the manager is holding over $250 million, with Venture XIV holding the largest amount of the loans, at over $13 million. Octagon Credit Investors also has over $200 million across its portfolio in 32 CLOs, and HPS Investment Partners is exposed to around $175 million but only across 15 CLOs.
Source: IHS Markit, debtwire
Percentage of 20 fastest falling loans in GoldenTree 2012-1
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