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Fitch: U.S. CLO Net Loss Steady Even As 2020 CLOs Reduce October Net Gains

November 19, 2020, 07:30 AM
Filed Under: Industry News

The average net loss for portfolios of U.S. broadly syndicated loan (BSL) CLOs under Fitch's surveillance steadied in October at -1.4%, even while 2020 vintages reduced their average net gain, Fitch shows in its latest Monthly U.S. CLO Index. The average net gain for 2020 vintage CLOs shrunk to 0.04% in October from 0.2% in September after many in the sample executed on par flushes.

Other metrics improved. Senior overcollateralization (OC) and junior OC cushions averaged 7.5% and 2.4%, respectively, in October for CLOs still in their reinvestment period (RP), each up 10 bps from September. The 'AAAsf' rating loss rate cushions also improved, averaging 6.6% for CLOs in RP, up from 6.4% in September.

The average weighted average spread (WAS) for CLOs in the Index moved higher for the fifth month in a row, to average 3.74% while the average WAS covenant level declined, leading to fewer than 2.0% of CLOs in the Index failing their WAS tests in October. The weighted average life (WAL) test was more problematic as average portfolio WALs increased slightly in October against shorter WAL test levels. The percentage of CLOs failing their WAL tests in October increased to 10% from 9.5% in September.

There were fewer CLOs with triple-C concentration excesses, though still more than 61% of Fitch-monitored CLOs in their RPs with October trustee reports are exceeding either a 'Caa' limit based on Moody's ratings or a 'CCC' limit referring to Standard and Poor's (S&P's) ratings. Fewer triple-Cs drove better portfolio quality using Fitch's weighted-average rating factor (WARF), which improved to 35.2 on average in October for CLOs in their RP, compared with 35.3 in September. The 'B' level WARF is 32.2, and 40.6 for 'B-'.

Fitch's Watchlist exposure, made up of Fitch's Top Loans of Concern (TLoC) and those otherwise rated 'CCC+' to 'C', eased to a still-high 12.2% of the Index portfolio in October, down from 13.1% in September and the recent high of 16.0% logged in May. Default exposure however increased slightly, moving to 1.2% of par notional from 1.1% in September, but below its recent high of 1.4% logged in July.

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