Downward rating actions on collateralized loan obligation (CLO) issuers slightly outnumbering the issuers that experienced with upward rating actions, one of several signs of slight weakening in the asset class’s performance in the month of May, according to industry observers.
Twenty-seven issuers experienced downward rating actions, while 22 issuers had upward rating actions, according to the monthly U.S. CLO Index Summary for May. The net negative rating activity continued for a second month in a row.
Whenever Fitch did issue negative rating actions on CLOs under its surveillance, they were most prominent among consumer products and healthcare providers. Also, they happened among ‘B’ category notes, and stayed within that range.
On average, CLOs had a default exposure of 0.1% at the end of May, according to the latest update from Fitch Ratings. That metric includes Talen Energy, which had filed for bankruptcy during May. Also, Envision Healthcare restructured through a below-par debt buyback in May, but that transaction was completed before the end of the month. Overall, default exposure remains low.
Exposure to issuers with a rating on a negative outlook was 12.6%, easing back from 13.0% in April—and remaining at a low level previously seen pre-pandemic.
While the structured finance industry continues to shift away from pricing adjustable assets on LIBOR, Fitch noted that the average exposure to issuers with a SOFR-linked loan held in Fitch-monitored reinvesting CLOs increased to 17% in May, up from 14% in April. Meanwhile, 2% of CLOs have notes linked to SOFR.
As the broader economy continues to grapple with rising interest rates, and as SOFR transition and floor benefits fall away, the average weighted spread on CLOs moved lower. Also, the CLOs that reinvested their returns and tripped the collateral quality test had tripled, according to Fitch.
