Energy companies may be highly represented in the U.S. speculative grade debt market, but that doesn’t necessarily bode ill for securitizations of speculative grade loans, according to Standard & Poor’s.
Based on a review of about 700 U.S. CLO’s rated by S&P, the average exposure to energy companies is only about 3.3%; that’s a much lower concentration than these companies have in overall junk bond and leveraged loan markets, at 17%.
(S&P’s calculation excludes defaulted collateral and includes principal cash.)
Global oil and gas prices have fallen sharply in recent months as the result of increased production of shale oil and gas in the U.S. and reduced global demand. The price of Brent crude has fallen more than 40% since June; on Tuesday, it was around $60/barrel, the lowest it has been in nearly six years. U.S. West Texas Intermediary crude was at around $56--again, the lowest it has been in the past five and a half years.
S&P believes that a prolonged downturn in prices could result in lower profitability, impeding both the cash flows of U.S. oil and gas companies and their ability to access the capital markets for liquidity.
However S&P does not expects this to have a detrimental effect on its CLO ratings because this asset class’ exposure to the energy sector is relatively muted.
What’s more, the volatility in the oil markets has yet to rattle the overall U.S. credit environment. The trailing-12-month speculative-grade default rate reported for December is 1.6% and the anticipated default rate through September 2015 is 2.4%--a fraction of the 30-year historical average of 4.4% for U.S. speculative-grade companies (those rated 'BB+' or lower).
“U.S. CLOs have benefited immensely from this favorable credit environment and the low default rates. The improved performance has resulted in an overwhelming majority of upgrades: 2014 is likely to be the fourth consecutive year in which we have raised over 1,000 of our U.S. CLO ratings,” S&P stated in a report published this morning.
Breaking CLO exposure to energy down by vintage, those issued between 2004 and 2008 have an average exposure of 2.7%, with the highest exposure of any single transaction coming in at 16.42%.
For CLO 2.0 printed after 2009, the average exposure is almost 100 basis points higher, at 3.7%, with the highest exposure of any single transaction at 14.78%.
Of the 15 U.S. CLO transactions with collateral representing greater than a 10% exposure to issuances from oil and gas, four are U.S. CLO 1.0 transactions and 11 are CLO 2.0 transactions.