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U.S. CLOs Log Higher Spreads, Steady Metrics in August, Says Fitch

September 14, 2020, 09:10 AM
Filed Under: Industry News

Most U.S. broadly syndicated loan (BSL) collateralized loan obligations (CLOs) under Fitch Ratings' surveillance showed stable or improving portfolio metrics in August compared with July, as rating pressure on underlying loan issuers eased and LIBOR floors supported spreads, Fitch says in its latest Monthly U.S. CLO Index report. The steadier metrics have come at a cost, with net portfolio losses being one number that continues to weaken, albeit slightly.

"This month the LIBOR floor benefit to CLOs became noticeable - even though LIBOR has been at a low level for a few months now," said Deborah Ogawa, Senior Director in U.S. Structured Credit. "Many of the loans with floors have them set at 1%, which provides a boost considering CLO notes are generally floored at zero and the rate itself is around 24bps for three-month LIBOR." Since April, 76% of regular new issue first lien term loans captured by LevFIn Insights, a Fitch group company, have a LIBOR floor, primarily of 75 bps or more.

The average weighted average spread (WAS) was 3.7% in August for CLOs in the Index with a WAS test, up 20bps from July. The failure rate for the covenant eased to 2.3% in August from 5.4% in July, with 24 CLOs that were previously failing WAS tests coming into compliance.

Net rating actions for Issuer Default Rating (IDR)-equivalent ratings used in CLO surveillance were positive for the second month in a row, which helped support portfolio credit quality. In terms of Fitch's weighted-average rating factor (WARF), the average improved to 35.7 in August, compared with 36.1 in July. For reinvesting CLOs, the average was 35.5 in August, better than 35.8 in July. The 'B' level WARF is 32.2, while for 'B-' it is 40.6.

Between mid-March to the end of August, Fitch-monitored CLOs slimmed their gaming, lodging & entertainment, business services, consumer products, and retail exposures the most, while increasing weightings to banking & finance and aerospace & defence.

Credit risk sales, as well as defaults, continue to pressure the net loss positions of portfolios. The average net loss level for CLOs under Fitch's surveillance and still in their reinvestment period was -1.4% at the end of August, compared with -1.3% net loss at the end of July. The last time the average was positive was in the June 2019 Index report. Only the few 2015 vintage CLOs and those done this year logged better averages between July and August.

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