Restrictions on travel and economic activity as the result of the coronavirus outbreak is adding risk to leveraged-loan issuers and CLOs exposed to underlying firms in highly vulnerable sectors.
Ample access to cash and debt, along with strong diversification strategies built into investment portfolios, will help asset managers and junk-rated corporate borrowers absorb any near-term substantial economic headwinds, according to Fitch Ratings.
Even some of the most high-risk industry segments – gaming operators with exposure to casinos in China’s Macau region, or hotel operators and airlines facing a steep drop in global travel – will remain stable because of a “mix of diversification, leverage headroom, and liquidity buffers [that] will help leveraged loan issuers absorb demand-side contractions because of decreased economic activity” from the outbreak, Fitch’s report stated.
Fitch estimates that leveraged-loan issues from sectors that are most vulnerable to a slowdown in demand and production make up 12% of total assets of U.S.-based, broadly syndicated collateralized loan obligations.
Among the highest CLO exposures in the travel industry are through loans issues from American Airlines, United Airlines, Travelport and Sabre GLBL. U.S. gaming operators like Caesars, Scientific Games Corp. and The Stars Group have limited China exposure, according to Fitch.
CLOs already have “little exposure” to other vulnerable industries subject to economic slowdown from the spread of the coronavirus, such as oil and gas (3% of the aggregate notional amount of the par value of outstanding CLOs) and metals/mining (1%).
And only 74 of 668 CLOs still within reinvestment periods have more than 15% exposure to “high” impact sectors, and “most continue to have ample overcollateralization (OC) cushions” to absorb potential portfolio stress.
