Collateralized loan obligations have very limited exposure to Alpha Natural Resources, which filed for bankruptcy Monday.
The coal producer has a single, $625 million term loan B outstanding, according to rating agency reports; other senior secured debt includes $610 million in revolving credit borrowings.
Fewer than 170 CLOs are exposed to the issuer, according to Intex data cited in research published today by Wells Fargo.
And Thomson Reuters LPC data show that U.S. CLOs own only $308 million of total exposure to Alpha Natural Resources and only $265.2 million of exposure to the term loan B. That’s a tiny fraction of the $410 billion in total U.S. CLOs outstanding.
Furthermore, after analyzing the Intex data, Wells Fargo concluded that no single CLO has more than 1.3% of its assets invested in Alpah Natural resources, and only four deals completed since the financial crisis have more than 1.0% exposure.
An additional 33 CLOs (32 post-crisis, 1 pre-crisis) have between 0.5% and 1.0% exposure to Alpha Natural Resources.
Alpha Natural Resources has been under pressure from depressed metallurgical coal prices, which made it difficult to service the debt it took on to acquire Massey Energy in 2011. Extending its maturities and reducing its indebtedness via a small distressed debt exchange proved insufficient to shore up its capital structure.
The company has obtained $692 million in 18-month debtor-in-possession financing, which it says will provide significant operational flexibility to reorganize.
The overall loan market default rate continues to be low; the issuer based default rate has been below 1.0% since May 2014. However, recent pressures in energy and mining have led to investors anticipating higher defaults in the future, according to Wells Fargo.
“We stress that CLO investors should look at individual portfolios rather than painting an industry with a broad brush; with that caveat in mind, Intex data show that only 2.1% of post-crisis CLO collateral is metals and mining, and only 9% of deals have more than 4.0% exposure to the industry as a whole,” the report states.
While holders of senior CLO notes have little to fear from these levels of exposure, even relatively small exposure to a default can hurt holders of the most subordinate tranches, known as the equity.
“The default of a portfolio asset with an exposure of as low as 0.50% can reduce the CLO equity par net asset value by more than two points due to the leverage in the CLO structure,” the report states.
