Key Takeaways

• Ninety-three issuers ended fourth-quarter 2019 with lower ratings, while 29 issuers ended the quarter with higher ratings.
• Amongst collateralized loan obligation (CLO) holdings at the end of the third quarter across 81 CLO managers, average manager exposure to fourth-quarter downgrades was 5.9%, while average exposure to fourth-quarter upgrades was 1.7%.
• Investor attention to the performance of the underlying entities in CLOs this late in the credit cycle, and the potential consequences for those CLOs, has increased.

For CLO market participants, downgrades into the 'CCC' category ('CCC+', 'CCC', 'CCC-') from ‘B-‘ and above and downgrades into the nonperforming category ('CC', 'SD', 'D') from ‘CCC-‘ and above (together, the “notable” downgrades) are of particular concern due to the potential impact to the O/C numerator  and potential changes to payment sequences across the various CLO investors. On average, the loans to issuers that experienced a “notable” downgrade in the fourth quarter experienced a 10-point drop between the start and the end of the fourth quarter.

In the fourth quarter, the CLO Insights index (see "SF Credit Brief: Wrap Up Of 2019 U.S. CLO," published Jan. 29, 2019) experienced a favorable 32 basis point (bp) decline in 'CCC' exposure (to 4.64% from 4.97%), an adverse 39 bp increase in nonperforming loans (to 0.67% from 0.28%), along with an adverse 13 bp decline in par (to 29 bp from 15 bp, relative to the par balance at the start of 2019). As a result of these net changes, the cushion of the junior O/C tests declined by 46 bps during this time to the lowest point in 2019 (to 3.69% from 4.14%). Some deals within this index were close to failing their junior O/C tests at the end of 2019.

In the interactive chart below, we show notable third-quarter U.S. CLO manager exposures to downgrades in the fourth quarter. Specifically:

• On the left, we list 18 CLO managers that manage eight or more reinvesting S&P-rated U.S. broadly syndicated loan (BSL) CLOs.
• On the right, we list 15 of the issuers that experienced “notable downgrades” during the fourth quarter.

Hover your mouse over one of the managers listed on the left, and the highlighted connecting lines will indicate the exposure to the various issuers that had “notable” downgrades within the fourth quarter. Alternatively, hover your mouse over one of the issuers on the right, and the highlighted lines will indicate which of the 18 managers had exposure to this downgraded issuer. The thickness of the connecting lines indicate the volume of exposure. Click and drag either the manager or issuer boxes in their respective columns if you wish to change the order in which they appear.

Notable Third-Quarter 2019 U.S. CLO Manager Exposures To Downgrades In Fourth-Quarter 2019

^{Source: S&P Global Ratings.
Copyright © 2020 by Standard & Poor's Financial Services LLC. All rights reserved.}

See the full version of this article, “U.S. CLO Manager Exposure To Downgrades And Upgrades: Actions Have Consequences," which includes a list of the 93 issuers with loans held in US BSL CLOs that ended the fourth quarter with a lower rating and a list of the 29 issuers that ended the quarter with a higher rating. We also include a list of exposure to these upgrades and downgrades for 81 CLO managers across the S&P-rated deals they manage.