Defaulted Holdings in CLOs Ticked Up in 4Q

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Asset default rates climbed slightly for both U.S. CLO 1.0 and CLO 2.0 vintages in the fourth quarter, according to a report from Moody’s Investors Service.

The monthly change for defaulted holdings in CLO 2.0s – which now comprise 95% of the market for outstanding CLO issues – rose 0.1%  and now stand at 0.12%. The rate for CLO 1.0s rate 0.12%, now standing at 3.13%.

The default rate increase was driven by three loan defaults in the quarter: Business services provider Twenty Eighty, cancer care firm 21 Century Oncology and oil services company Petroleum Geo-Services, Moody’s reported.  

In Europe, the main trend experienced during the fourth quarter was the decline in collateral weighted average spread. Among European CLO 2.0s, it declined five basis points to 4.71%, due mainly to declining Euribor floor levels and spread compression during a heavy period of redemption and refinancing activity, according to Moody’s.

Also declining marginally for CLOs on both sides of the pond was weighted average rating factor, which presents a numerative scale of the range of asset ratings in a CLO pool. The median WARF for US. CLO 1.0s worsened to 2721 from 2683 (the higher number representing higher-risk assets in the collateral), mostly a result of higher-quality assets being paid down, Moody’s asserts.

The holdings of the lowest-rated assets increased slightly in both vintages of U.S. CLOs. These are usually the results of corporate downgrades, the most notable of which was the J. Crew Group in the fourth quarter: it was downgraded to ‘Caa2’ from ‘B3’ by Moody’s, affecting 192 CLO 2.0s with an average exposure of 0.43% to J. Crew’s loans.

Among CLO assets, Valeant Pharmaceuticals was the most sold name in the CLO market, with $245.8 million selling off compared to $164.1 million in Valeant loans being added to CLO portfolios. That trend may likely continue this quarter if the loan market appetite reflects the equities field: reports surfaced Monday that private equity firm Pershing Square has decided to bail on more than 27.2 million shares (A 5.3% stake), pushing down Valeant shares by 9% to $11 a share in after-hours trading.

That compares its peak $245-per-share valuation – resulting in an estimated $3 billion loss for hedge fund billionaire Bill Ackman’s firm.

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