Deal Scan: Defaults on Loans Held in Fitch-Rated CLOs "Benign"

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The default rate for leveraged loans held by CLOs rated by Fitch Rating remains benign, at 0.4%, although slight concerns remain about bankruptcies looming defaults from speculative-grade debt held by key retail, media and energy firms.

Near the top of the list worries is $2.89 billion in debt by oil and gas offshore exploration company Seadrill Partners Ltd., a company saddled with imminent default ratings that is held by 66 CLOs to rate as the second highest “loan of concern” on Fitch’s watchlist of CLO-exposed debt.

The overall trailing 12-month (TTM) leveraged-loan default rate was 2% at the end of March, and is projected to be slightly above 2% by year’s end, according to Fitch.

The CLO default rate was near 1% a year ago, but has been below 0.5% since last June.

Retail loans remain the most visibly troubled sector in leveraged loans, with a surge of defaults expected to raise the sector’s institutional loan default rate to 9% by the end of the year. The rate stood at 0% prior to the April 5 bankrutpcy of Payless ShoeSource, and loans held by retailers Sears ($2.52 billion), Gymboree ($769.1 million) and Rue21 ($538 million) are among those with the highest levels of investor concern for the junk loan market, according to Fitch.

However, CLO exposure to retail companies is limited to just 0.6% of the total portfolio volume of 288 broadly syndicated CLOs rated by Fitch. While Payless' filing “kicks off a period of elevated concerns for retail bankruptcies with institutional term loans, the overall rate remains benign," said Eric Rosenthal, a senior director for leveraged finance with Fitch.

The list of “loans of concern” within Fitch-rated CLOs includes both Seadrill and Pacific Drilling ($723 million) which have looming defaults.

Checkout Holdings Corp. ($1.51 billion) is atop the loans of concern list for CLOs, with being held in 77 transactions.

For the loan market as a whole, the probable bankruptcy filing by radio station ownership group iHeartCommunications could result in $6.3 billion in defaulted junk loan debt in the institutional market – and could alone add 0.6% to the TTM default rate to push it over 2% for the first time since October.

European Warehouse Facility: HPS Investment Partners is marketing a CLO warehouse facility, Aqueduct European CLO 1-2017 DAC, according to Standard & Poor's.

Refis: ZAIS CLO 2 is refinancing, as is Dryden XXVII Euro CLO 2013 BV (for the second time) and York CLO-1.

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