Will CLOs Be Singing The Delta Blues? - Corporate Credit, COVID Variants, And CLOs
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Will CLOs Be Singing The Delta Blues?
Corporate Credit, COVID Variants, And CLOs
This report does not constitute a rating action.
U.S. CLO ratings weathered the COVID-19 pandemic in 2020 with only modest damages. But with elevated
corporate leverage ratios, a historically weak mix of corporate ratings, and declining recovery prospects,
will the ratings of pre-pandemic CLOs come under pressure again? On Thursday, Oct. 7, a panel of S&P
Global Ratings senior corporate and CLO analysts discussed the state of leveraged finance, the impact of
the Delta variant, and the implications for CLO ratings. This slide deck is adapted from content presented
during the session (“Live Webinar and Q&A: Will CLOs Be Singing the Delta Blues? Corporate Credit, COVID
Variants & CLOs”).
A replay of the webcast can be found here.
Moderator:
Steve Anderberg, Sector Lead, U.S. CLOs
Speakers:
Phil Baggaley, Sector Lead (Transportation, Aerospace & Defense)
Emile Courtney, Director (Hotels & Leisure)
Daniel Hu, Director (U.S. CLOs)
Melissa Long, Director (Gaming & Cruise Lines)
Betsy Snyder, Director (Transportation)
Sarah Wyeth, Sector Lead (Consumer & Retail)
Hanna Zhang, Director (Leveraged Finance)
2Contents
Leveraged Finance Overview 4
Corporate Sector Snapshots 10
– Airlines & Transportation 10
– Lodging & Leisure 15
– Gaming & Cruise Lines 19
– Retail & Restaurants 22
What Does it Mean for BSL CLOs? 26
3Corporate Sector Snapshots
Leveraged Finance Overview
Hanna Zhang
Director,
Leveraged FinanceLeveraged Finance| Key Takeaways
Leverage Dropped Below Pre-Pandemic Levels For Most
– After 18 months, the overall median leverage of speculative-grade borrowers has returned to, or improved from, 2019
levels. EBITDA growth more than offset the resurgence in debt borrowing.
– EBITDA margin expansions observed of late were attributed to a variety of factors such as companies’ ability to push
through price increases, tight cost controls, and strong inventory management.
– Chemicals and consumer products sectors are leading the way in deleveraging, and both have capitalized on the
rebound in the U.S. economy and spending levels. The auto/trucking sector is also reaping the benefits of strong
consumer demand and higher prices on more profitable light trucks, while OEM supply is still hampered by
semiconductor-related chip shortages.
– Technology and telecommunications are among the sectors least disrupted by the pandemic, evidenced by both having
the smallest swings of median last-12-month (LTM) leverage within our observation period.
Source: S&P Global Ratings
5Leveraged Finance| Key Takeaways
EBITDA Rises, But Demand Reversion And Debt-Funded Acquisition Can Delay Rating Improvement
– Leverage moderation was fueled by EBITDA growth more than debt reduction. Median LTM EBITDA grew
28% in the first half of 2021, and about one-third of the sample have seen consecutive growth every
quarter since the second half of 2020.
– Debt levels began to rise this year. The resurgence was largely driven by mergers and acquisitions (M&As)
and dividend recaps, which are putting pressure on companies’ credit measures and will likely delay the
potential improvement in credit quality.
– The median size of cash holdings doubled since third-quarter 2019 and has stayed elevated. More recently,
companies have built up cash balances from a variety of sources, including IPOs, asset monetizations, and
equity offerings.
– As stabilization of operations reduce the need for a liquidity buffer, more emphasis is being put on how
companies use their cash. We see companies increasingly favoring acquisitions for growing size, and
currently favorable funding rates will continue to encourage aggressive financial strategies such as
sending large cash payouts to shareholders.
Source: S&P Global Ratings
6U.S. Corporate Sectors | Median Leverage Returned To Pre-Pandemic
Levels Median Gross Leverage (x)
Entity count Q3 2019 LTM 2019 Q1 2020 LTM Q2 2020 LTM Q3 2020 LTM 2020 Q1 2021 LTM Q2 2021 LTM
Aerospace/defense 19 3.4 3.3 3.3 5.1 3.7 5.2 5.4 5.5
Auto/trucks 32 3.7 3.8 4.3 6.9 6.2 5.3 5.1 3.5
Business and consumer services 85 6.7 7.1 7.3 7.5 7.2 7.0 7.0 6.4
Capital goods/machine and equipment 126 6.0 5.9 6.3 6.3 6.4 6.0 6.0 5.5
Chemicals 37 5.2 5.3 5.5 6.5 6.0 5.3 4.7 4.0
Consumer products 93 5.9 6.2 6.5 6.5 6.1 6.2 5.0 5.0
Forest products/building
38 4.4 4.4 4.7 4.2 4.1 3.6 4.0 4.2
material/packaging
Health Care 99 6.8 6.7 7.4 7.3 6.9 7.6 6.9 6.3
Media, entertainment, and leisure 137 5.3 5.0 6.2 8.4 8.4 8.3 8.5 7.0
Mining and minerals 45 3.0 3.1 3.3 4.2 4.6 4.6 4.3 3.0
Oil and gas 70 2.5 2.9 3.0 4.1 5.3 5.1 5.3 4.0
Restaurants/retailing 74 4.1 4.3 4.8 6.9 6.1 6.1 5.7 4.1
Real estate 31 7.3 7.0 8.0 7.8 8.0 7.8 8.1 6.8
Technology 90 6.9 7.6 7.6 7.6 6.7 6.6 7.2 6.9
Telecommunications 43 4.9 5.0 4.8 4.9 5.0 4.8 4.7 4.9
Transportation 27 3.6 3.5 4.6 6.5 7.9 7.6 7.2 6.9
Total 1,046 5.3 5.3 5.9 6.6 6.3 6.2 6.0 5.3
Leverage is calculated as reported gross debt over reported EBITDA, without adjustment by S&P Global Ratings. The dataset contains 1,046 speculative-grade industrial corporate entities that we rate in the U.S. and
Canada, covering both public and private companies. Footnote to slide 5 charts: reported gross debt and EBITDA without adjustment by S&P Global Ratings. LTM--Last 12 months. Source: S&P Global Ratings
7U.S. Corporate Sectors | Debt Resurgence Driven By M&A And Shareholder
Returns
$200 $960
$932 $936 $932 $935
$190 $940
$910 $920
$180 $902
$183
$167 $167 $900
$170 $163
$ mil.
$ mil.
$880 LTM Reported EBITDA
$862 $156
$160 Gross Debt (right scale)
$850 $860
$150 $144 $143
$140 $840
$140 $820
$130 $800
2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2
$130
$120
$110
$114 $114
$111 $112
$100 $108
$103
$ mil.
$90 Cash (incl. cash
equivalents and short-
$80 term investments)
$70
$60 $66
$50 $55
2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2
Source: S&P Global Ratings.
8Speculative Grade | Upgrades Far From Reversing Downgrades
U.S. and Canadian nonfinancial corporates
Downgrade Upgrade Net Cumulative net changes since 2/2/20 (RHS)
100 0
50
-100
0
-200
-50
-100 -300
-150 -400
-200
-500
-250
-600
-300
-350 -700
Covers U.S. and Canadian speculative-grade nonfinancial corporate ratings. Downgrades, upgrades, and net show the 4-week trailing sum of ratings changes. Cumulative net changes are the absolute sum of net
ratings changes since Feb. 2, 2020. Source: S&P Global Ratings
9Corporate Sector Snapshots
Airlines & Transportation
Phil Baggaley
Sector Lead, Transportation,
Aerospace & Defense
Betsy Snyder
Director, TransportationU.S. Airlines | Key Takeaways
Beginning to see some daylight
– Airline passenger levels surged during the spring and summer but remained 20%-25% below
2019 levels.
– The timing and extent of business and international travel recovery remain uncertain.
– We lowered our ratings on U.S. airlines by 1-4 notches in the spring of 2020 and maintain our
negative rating outlooks.
– Since June 2021, we have revised rating outlooks to stable or positive.
– Credit ratios this year will be below levels supporting upgrades, but 2022 may see higher
ratings.
Source: S&P Global Ratings
11U.S. Airlines | Delta Variant Slows, But Does Not Stop Recovery
Industry unlikely to recover fully before 2023
TSA Throughput 2021 % Change vs 2019 – Summer Surge. Pent-up demand for leisure travel
% Δ vs 2019 (7-day moving avg.) powers domestic traffic recovery.
0% – Business travel lags but is improving. Business traffic
trended upwards, but the Delta variant is postponing
-10% some return-to-the-office and, as a result, corporate
travel.
-20% – International travel is still mostly dormant. Except for
TSA Airport Throughput
nearby beach destinations (Mexico, Caribbean, etch.),
-30%
international is stymied by government restrictions
and passenger fears of being stranded.
-40% – Massive federal aid finally winds down. The payroll
support program was mostly done by Q2, but that and
generous capital markets leave airlines with ample
-50%
liquidity.
-60%
– Airline managements look to rebuild balance
sheets. Priorities begin pivot from borrowing to boost
liquidity to paying down debt, rebuilding the balance
-70%
Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21
sheet, and unencumbering some assets.
Source: S&P Global Ratings.
12U.S. Airlines | Ratings At Or Near Post-COVID Lows, But Outlooks Now
Stable Or Positive
Funds From Operations/Debt (%) U.S. Airline Ratings: Current Vs Pre-COVID-19
American Airlines Delta Air Lines United Airlines CLO Rank Current February 2020
50 Issuer (#) Ratings/Outlook Ratings/Outlook
Southwest Airlines Co. -- BBB/Positive BBB+/Stable
40
Delta Air Lines Inc. 293 BB/Stable BBB-/Stable
30
Alaska Air Group Inc. -- BB-/Positive BB+/Stable
20 JetBlue Airways Corp. -- B+/Positive BB/Stable
10 United Airlines Holdings, Inc 15 B+/Stable BB/Positive
0 Allegiant Travel Co. 674 B+/Stable BB-/Stable
Spirit Airlines Inc. -- B/Positive BB-/Stable
-10
American Airlines Group Inc. 7 B-/Stable BB-/Stable
-20
2019 2020 2021F Hawaiian Holdings Inc. -- CCC+/Positive BB-/Stable
U.S. Airline Syndicated Loans Mainly Secured by Intangibles
– International routes, takeoff and landing slots, airport gates
– Frequent flyer programs
Source: S&P Global Ratings.Aircraft Lessors Car Renters
– Fewer requests for lease deferrals and – Demand has recovered amid a vehicle shortage.
restructurings. The worst seems to be over for their Demand has returned at U.S. airports because
airline customers. domestic leisure traffic has recovered, resulting in a
– Demand for wide-body aircraft is expected to shortage of available vehicles and record high rental
remain under pressure. Strength in shorter haul car pricing.
leisure traffic has increased demand for narrow-body – Used car prices are at record highs: A shortage of
aircraft, while weak longer haul international traffic used vehicles for sale has resulted in record-high
should continue to depress demand for wide-body used vehicle prices.
aircraft. – Earnings and cash flow have recovered. Higher
– Access to liquidity has remained strong. The capital rental rates have benefited car renters’ earnings and
markets have remained open, particularly for cash flow just a year after they reached their trough
unsecured debt and at record low rates. at the beginning of the pandemic.
– Aircraft lessors’ market share is expected to – Access to capital remains strong. The sector
increase. With demand for newer and more efficient continues to have strong access to capital.
aircraft that lessors have, their market share of the
global fleet could approach 50% over the next few
years.
Source: S&P Global Ratings.
14Corporate Sector Snapshots
Lodging & Leisure
Emile Courtney
Director, Hotels & LeisureU.S. Lodging | Key Takeaways
Delta could impact business and group travel
– We believe the greatest impact from the Delta variant could be in business and group travel in full-service lodging, and in fitness, with many other outdoor
recreation and out-of-home entertainment options less affected.
In lodging:
– The summer leisure surge in hotel demand drove better-than-expected trends in U.S. RevPAR year-to-date through August, but the back-to-office delays and uncertainties
regarding in-person schooling in some parts of the U.S. this fall have the potential to limit business and group travel and hold back recovery in the full-service hotel sector for the
remainder of this year.
– The booking window in the hotel sector remains very short, and that makes it tough for hotel owners to plan and staff up sufficiently to meet demand when there is currently a lot
of competition for labor. That may keep hotel labor costs atypically low for a while. But that’s not a stable planning environment, and it won’t last once conditions normalize.
– One other risk factor to think about in lodging ratings is leveraging M&A or other capital actions such as companies potentially resuming dividends and share repurchases.
In fitness:
– The Delta variant could slow the recovery in gym memberships if indoor mask mandates or other restrictions are reinstated in some places. All fitness ratings
remain in the ‘CCC’ category because of very high leverage that may not be sustainable.
– The Delta variant is not apparently hurting the regional theme parks. Even if there is a modest slowdown in coming months over the holiday season, following a very
strong summer season where attendance was exceeding 2019 levels in most open theme parks around the country. Over the past two months, we raised our
ratings on all four regional theme parks: SeaWorld, Six Flags, Cedar Fair, and Herschend.
– Outdoor recreation continues to do well. Boat, RVs, and fishing gear sales continue to surge as these activities continue to lend themselves to social distancing and
limited constraints.
– We expect the ski sector to recover in the upcoming 2021-2022 ski season, probably close to 2019 levels of visitation, following a ski season that was significantly
impaired by COVID-19-related restrictions last year that resulted in low visitation and ancillary spending on restaurants and ski schools. The Delta variant could
cause some restrictions indoors at ski resort restaurants and bars, but we are forecasting a recovery that has nearly all rated ski resorts at to pre-crisis levels.
Source: S&P Global Ratings
16U.S. Lodging | Delta Delaying Return To Office, And Business And
Group Travel Recovery
U.S. RevPAR will not return to 2019 levels until 2023 at the earliest – 2021 (20%-25% below 2019); 2022 (5%-15% below 2019)
US RevPAR Trend 2021
RevPAR YTD – The Delta variant is delaying the return to office among some companies and
% Change vs 2019 lengthening the recovery period of business transient travel and group
20%
bookings, thereby placing a greater burden on leisure travel.
January – We expect recovery in business and group travel will strengthen in 2022, but
0% U.S. RevPAR will likely not return to 2019 levels until 2023 at the earliest.
February
– Most lodging ratings have a negative outlook because there remains
-20% March
significant downgrade risk in the sector, given the sensitivity to any potential
April slowdown in the recovery of hotel occupancy or rate.
-40% May – In the U.S., the economy, midscale, and extended-stay hotel segments have
June outperformed the overall lodging industry since the beginning of the
-60% pandemic. We expect this trend to continue in 2021, with the economy and
July
midscale segments will lead the lodging sector's recovery.
-80% August
– A successful initial vaccination campaign in the U.S., massive fiscal stimulus
and consumer savings, and pent-up demand for leisure travel could mean
-100%
the worst really is behind us.
– While the recovery will be a long, tough road, we believe that trends are
toward the better end of our base-case forecast.
Source: S&P Global Ratings.
17U.S. Lodging | Leisure Stabilizing, Lodging, Fitness Still Largely
Negative
Sector Outlook Distribution Key Rating Actions: Current Vs Pre-COVID 19
As of 09/30/2021 CLO Rank Current February 2020
Issuer (#) Ratings/Outlook Ratings/Outlook
Marriott International LLC -- BBB-/Negative BBB/Stable
Hyatt Hotels Corp. -- BBB-/Watch Neg BBB/Stable
Stable, 44%
Host Hotels & Resorts Inc. -- BB+/Negative BBB-/Stable
Negative, 39%
Choice Hotels International Inc. -- BBB-/Stable BBB-/Stable
Positive, 12%
Hilton Worldwide Holdings Inc. 280 BB/Negative BB+/Stable
WatchPos, 2%
Four Seasons Holdings Inc. 863 BB/Negative BB/Stable
WatchNeg, 2%
Wyndham Hotels & Resorts Inc. 498 BB+/Stable BB+/Stable
Developing, 2%
Alterra Mountain Co. 52 B/Stable B/Stable
SeaWorld Parks & Entertainment Inc. 234 B+/Positive B+/Stable
– Outdoor recreation (boats, RVs) stable
– Out-of-home entertainment (regional theme parks, ski) stable/positive
– Fitness negative
– Lodging mostly negative – low-end hotel franchisors stable
Source: S&P Global Ratings.
18Corporate Sector Snapshots
Gaming & Cruise Lines
Melissa Long
Director, Gaming &
Cruise LinesU.S. Gaming | Delta’s Effect On Gaming Likely Modest, But More
Pronounced In Las Vegas
YTD as of August 2021, Las Vegas Strip gaming revenue at 2019 levels. Regional gaming revenue ahead of 2019.
Las Vegas’ Recovery Trend YTD – Leisure leads the way: Pent up demand for travel and gaming, loosening of
Las Vegas Strip Operating Metrics YTD restrictions, and the return of sports and entertainment accelerated Las
% Change vs 2019
Vegas’ recovery in the second and third quarters. Visitor volume and
occupancy lag gaming revenue and average daily rate (ADR), given limited
international and convention business.
40%
January – Delta variant remains a near-term risk: The variant delayed the return of
20% February some conventions and group meetings to Las Vegas in third-and fourth-
quarter 2021, but we believe 2022 bookings are still pacing well compared to
March
0% 2019.
April
– Sustainability of revenue recovery: A rebound in Las Vegas’ convention
-20% May business next year should smooth any pullback in leisure travel. Current
June strong demand for regional gaming could wane in 2022 as consumers deplete
-40%
July savings and alternate travel and entertainment options fully reopen.
-60% August – Sustainability of robust margin improvement: Operators may need to
increase marketing and labor costs somewhat to compete for discretionary
-80% income as other leisure alternatives fully reopen.
-100% – Asset sales: Asset sales could accelerate improvements in credit measures
for highly leveraged gaming companies.
– Leveraging M&A and shareholder returns: Operators could use improved
cash flow generation and leverage cushion to engage in M&A and shareholder
returns.
Source: S&P Global Ratings.
20U.S. Gaming & Cruise | Outlook Mixed Across Sectors
Sector Outlook Distribution Key Rating Actions: Current Vs Pre-COVID 19
As of 09/30/2021 Of top 250 CLO obligors and other select gaming/cruise CLO obligors
Current February 2020
Issuer Ratings/Outlook Ratings/Outlook
Stable, 36% Caesars Entertainment B/Stable B+/WatchNeg
Negative, 30% Scientific Games B/WatchPos B/Positive
Positive, 20% Station Casinos B+/WatchPos B+/Stable
WatchPos, 8% Bally’s Corp B/Stable B+/Negative
WatchNeg, 6% Penn National Gaming B/WatchPos B+/Stable
Carnival Corp. B/Negative A-/Negative
NCL Corporation Ltd. B/Negative BB+/Stable
– Regional gaming outlooks largely stable or positive, or on CreditWatch positive, given revenue recovery and margin improvement.
– Large Macau & Las Vegas operators either on CreditWatch negative or have negative outlooks.
– Cruise outlooks all remain negative given uncertainty around the industry’s recovery path, a gradual resumption in operations, and
extraordinary levels of incremental debt to fund cash burn while ships were docked.
Source: S&P Global Ratings.
21Corporate Sector Snapshots
Retail & Restaurants
Sarah Wyeth
Sector Lead,
Consumer & RetailRetail & Restaurants | Key Takeaways
Benefiting from pent-up demand
– Most of the retail industry is benefiting from pent-up demand and financially healthy consumers.
– Supply chain bottlenecks are likely to dampen growth well into 2022.
– Full price sell-through should provide some offset to inflationary pressures.
– Positive rating actions have outnumbered negative actions in 2021.
– Net positive bias in ratings reflects continued recovery in credit measures for some issuers and
improved competitive position in new normal for others.
Source: S&P Global Ratings
23U.S. Retail & Restaurants | Lingering Pandemic Dynamics
Industry top line and margins likely peaked in Q2 2021
E-Commerce Springs Back After Declining In July
– Delta variant: Marginal impact to consumer behavior. Nesting
95 trend isn’t over as consumers realize elevated time at home will
be extended. Consumers learned how to shop and dine safely.
90 Easy transitions between digital and brick-and-mortar.
– Supply chain constraints: Dislocation of shipping containers,
85 truck-driver shortage, overwhelmed ports, and COVID-induced
shutdowns leaves retailers struggling to procure inventory in
80
advance of holiday season. Expiration of federal supplemental
unemployment benefits should ease labor shortages. (See “Labor
And Supply Chain Woes Chill Retail Spirits For Holidays And
75 Beyond,” Sept. 28, 2021).
– Inflation pressure: Wages, freight, and merchandise cost
70
increases likely to dampen profits over next ~12 months. Large
retailers leasing ships or paying for air freight.
65
– Financially healthy consumers: Extraordinary savings and FOMO
support full-price selling. Consumers have $2.5 trillion in excess
60 savings, and savings rate continues to be high. Healthy demand
May-20
May-21
Jul-20
Jul-21
Oct-20
Feb-20
Feb-21
Dec-20
Aug-20
Aug-21
Jan-20
Jan-21
Apr-20
Apr-21
Mar-20
Sep-20
Mar-21
Sep-21
Nov-20
Jun-20
Jun-21
will roll into 2022 due to supply chain constraints.
Source: U.S. Census Bureau, S&P Global Ratings
24U.S. Retail and Restaurants | Positive Bias Reflects Continued Recovery
Sector Outlook Distribution Key Rating Actions: Current vs Pre-COVID 19
As of September 2021 Of top 250 CLO obligors
Current February 2020
Issuer Ratings/Outlook Ratings/Outlook
IRB Holdings B/Positive B+/Stable
Negative, 9%
Restaurant Brands International Inc BB/Stable BB/Stable
Stable, 75% Great Outdoors Group, LLC (FKA Bass Pro) BB-/Positive B+/Stable
Positive, 16% Harbor Freight Tools USA Inc. BB-/Stable BB-/Negative
Watch Pos, 1%
LS Group OpCo Acquisition LLC B/Stable --
Whatabrands LLC B/Stable B/Stable
Golden Nugget Inc. B-/CWPos B/Stable
Mavis Tire Express Services TopCo LP B-/Stable B/Stable
Petco Health and Wellness Company, Inc. B/Stable CCC+/Negative
– Majority of issuers have recovered credit quality to pre-pandemic level
–U.S. CLOs
What’s Changed Since 2020?
Steve Anderberg
Sector Lead, U.S. CLOs
Daniel Hu
Director, U.S. CLOsU.S. CLOs | Key Takeaways
Modest Collateral Improvement, Record Issuance
– CLO issuance in 2021 has exceeded expectations and is setting records. Reasons for record CLO new issue volume in
2021 YTD include the asset class coming through the pandemic relatively unscathed; there are fewer CLO skeptics now
than there were before the pandemic, and new investors have entered the space. Additionally, investors continue to
search for yield and relative value, and CLO ‘AAA’ (and other) tranches are perceived to offer attractive risk-adjusted
yields compared to comparable assets.
– New issuance totaled $130.2 billion through Q3, versus $91.8 billion for full year 2020. Further, U.S. CLO
refinancings/resets totaled $196.6 billion through the same period, having already eclipsed its full-year total of $167
billion set in 2017 (see slide 23 for further detail on issuance).
– Collateral metrics on pre-pandemic CLOs have improved since a year ago, although most are still not back to their
January 2020 levels. The average BSL ‘CCC’ basket (including new issue CLOs rated during 2020) is now 6.32%, versus
7.64% at the start of 2021 and 12.31% at their peak in 2020. The exposure to loans from obligors rated ‘B-’ has remained
pretty stable, however--it’s currently 25.15% of total CLO collateral compared to its peak of 25.71% in June of 2020.
Longer term, the proportion of loans from ‘B-’ obligors has doubled over the past four years.
– We reviewed 115 CLO transactions to evaluate their improvement over the last year when nearly all of them had seen a
negative rating action in the second half of 2020. On August 20th, we placed 252 of the ratings on CreditWatch positive
and three of the ratings on CreditWatch negative. The positive CreditWatch placements primarily reflect an overall
improvement in performance and credit, particularly the decrease in exposure to loans from companies rated in the
'CCC' category and paydowns to the senior CLO notes.
Source: S&P Global Ratings
27BSL CLOs | Improvement of Pre-Pandemic CLOs Level Off in 3Q
BSL CLOs Issued BSL CLOs Issued BSL CLOs Issued
in 2020 2017-19 2016 & Prior
Average 'CCC' Category Exposure – Credit metrics for 2020 vintage
Average Par Change YTD 2021
CLOs remain mostly stable in
0.00% 10%
2021
9%
-0.05% 8% – Par balance for pre-pandemic
7%
-0.10%
6%
CLOs have stabilized by Q3 2021
-0.15% 5% (reinvesting pre-pandemic CLOs
4% lost about 1% of par in 2020)
-0.20% 3%
2% – Average ‘CCC’ buckets of pre-
-0.25%
1% pandemic CLOs have dipped
0%
-0.30% below the 7.5% mark; stabilized
in Q3 2021
– After recovering in 1H 2021, OC
Average Junior OC Cushion Average 'B-' Exposure cushions for pre-pandemic CLOs
6.0% 26.00% have mostly stabilized in Q3
(about 1% lower than pre-
5.0% 25.50%
pandemic levels)
4.0% 25.00%
– ‘B-’ exposure remains stable;
3.0% 24.50% many issuers that were
2.0% 24.00% upgraded out of the ‘CCC’
1.0% 23.50%
category wind up at ‘B-’; average
‘B-’ exposure of about 27%
0.0% 23.00%
across 2021 vintage CLOs
Source: S&P Global Ratings.
28BSL CLOs | Exposure To ‘B-’ Assets Has Doubled Over Past Four Years
Rating Distribution for Assets In Reinvesting U.S. BSL CLOs (2017-Q3 2021)
2017YE 2018YE 2019YE 2020YE end 1Q2021 end 2Q2021 end 3Q2021 – Upgrades have outpaced
45%
downgrades across U.S. BSL
CLO obligors every month in
40% 2021.
– The ratings mix of obligors in
35% pre-pandemic CLO
portfolios have stabilized in
30%
Q3 2021.
25% – However, credit quality still
isn’t back to where it was
20% pre-COVID-19; loans from
issuers rated ‘B-’ now
15% comprise over 26% of CLO
portfolios, compared to
10%
about 20% prior to the
pandemic.
5%
– 2021 vintage new issue
0% CLOs have also seen a
higher level of exposure to
‘B-’ obligors.
Source: S&P Global Ratings.
29BSL CLOs | Recovery Ratings Mix Drifts Downward
Recovery Ratings for Assets in Reinvesting US BSL CLOs (2017 – Q3 2021)
2017YE 2018YE 2019YE 2020YE end 1Q2021 end 2Q2021 end 3Q2021 – Recovery ratings tend to be more
40%
stable than credit ratings, but
exposures within CLO collateral
35%
pools can migrate over time due
to new issue loans being issued
30% at higher or lower recovery
ratings, and sometimes due to
25% recovery ratings on existing loans
being raised or lowered.
20% – Over the past several years, there
has been a significant increase in
15% loans with a recovery rating of ‘3’
and point estimates of either
10% 50% or 55% (i.e., the 3L category
in the chart); they currently make
up over 37% of total CLO asset
5%
par, compared to about 30% prior
to the COVID-19 pandemic.
0%
1(90%/95%) 2(80%/85%) 2(70%/75%) 3(60%/65%) 3(50%/55%) 4(40%/45%) 4(30/35%) 5(20%/25%) 5(10%/15%) 6(0%/5%)
Corporate Recovery Ratings and Point Estimates Mapped to CLO 'AAA' Recovery Assumptions (see appendix for other CLO rating category
assumptions)
Recovery Rating 1+ 1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6
Rounded Point Estimate 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
CLO 'AAA' Recovery
Assumption 75% 70% 65% 63% 60% 55% 50% 45% 40% 35% 30% 29% 27% 24% 20% 18% 15% 10% 5% 4% 2%
*NR not included. Source: S&P Global Ratings
30BSL CLOs | Reinvesting Into Loans With Lower Recovery Ratings
BSL CLOs Issued BSL CLOs Issued BSL CLOs Issued Average Loan Turnover In First Three Quarters Of 2021
in 2020 2017-19 2016 & Prior
BSL CLOs Issued in 2020 46.90%
Average SPWARF Across CLO Insights 2021 US BSL CLO Index BSL CLOs Issued 2017-19 41.02%
2900
BSL CLOs Issued 2016 & Prior 41.69%
2850
2800
Through the first three quarters in 2021:
2750
2700 – The average loan turnover has surpassed 40%; the
2650
post-pandemic CLOs experienced greater turnover
2600
relative to the pre-pandemic CLOs (46% vs about
41%).
2550
2500 – The credit quality (SPWARF) of the pre-pandemic
2450 CLOs have improved in 2021 while the SPWARF of
2021JAN 2021FEB 2021MAR 2021APR 2021MAY 2021JUN 2021JUL 2021AUG 2021SEP 2021OCT the post-pandemic CLOs remained mostly stable.
– The weighted average recovery rate (WARR) has
Average WARR Across CLO Insights 2021 US BSL CLO Index* declined gradually in 2021; the post-pandemic CLOs
63.0%
started the year with a WARR that was higher than
62.5% the pre-pandemic CLOs but have experienced a
62.0% larger decline so far.
61.5%
– The WARR of the loans that are no longer held within
61.0% the portfolios is 62.0%; the WARR of the loans that
60.5% are newly added within the portfolios in 2021 is
60.0% 59.6%.
59.5% – The deterioration in the recovery rate distribution,
59.0% combined in some cases with par loss, has put
2021JAN 2021FEB 2021MAR 2021APR 2021MAY 2021JUN 2021JUL 2021AUG 2021SEP 2021OCT pressure on some of the rating cushions of pre-
*NR not included. Source: S&P Global Ratings pandemic CLOs.
31Copyright © 2021 by Standard & Poor’s Financial Services LLC. All rights reserved.
No content (including ratings, credit-related analyses and data, valuations, model, softw are or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or
distributed in any form by any means, or stored in a database or retrieval system, w ithout the prior w ritten permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be
used for any unlaw ful or unauthorized purposes. S&P and any third-party providers, as w ell as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy,
completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherw ise), regardless of the cause, for the results obtained from the use of the Content, or
for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT
LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULA R PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S
FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct,
indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, w ithout limitation, lost income or lost profits and opportunity costs or losses
caused by negligence) in connection w ith any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating
acknow ledgment decisions (described below ) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no
obligation to update the Content follow ing publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees,
advisors and/or clients w hen making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except w here registered as such. While S&P has obtained information from sources
it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of
reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknow ledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, w ithdraw , or suspend
such acknow ledgement at any time and in its sole discretion. S&P Parties disclaim any duty w hatsoever arising out of the assignment, w ithdraw al, or suspension of an acknow ledgment as w ell as any liability for any
damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information
that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection w ith each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underw riters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings
and analyses are made available on its Web sites, w ww.standardandpoors.com (free of charge), and w ww.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and
third-party redistributors. Additional information about our ratings fees is available at w ww.standardandpoors.com/usratingsfees.
Australia: S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and
must not be distributed to any person in Australia other than a w holesale client (as defined in Chapter 7 of the Corporations Act).
STANDARD & POOR'S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor's Financial Services LLC.
spglobal.com/ratings
32You can also read
