Default levels among U.S. collateralized loan obligations issued before the financial crisis decreased marginally in the first month of the years, but are likely to creep higher, according to Moody’s Investors Service.
That’s because many of these older CLOs have exposure to Texas Competitive Electric Holdings, an affiliate of Energy Future Holdings, which filed for bankruptcy on April 29.
Moody’s reported today that defaults of so-called CLO 1.0 decreased to 0.89% on Feb. 1 from 0.94% on Jan. 1. However, the credit rating agency expects these levels to change in coming months once trustee reports reflect CLOs’ exposures to Texas Competitive Electric Holdings. As of May 1, roughly 165, or 26% of all U.S. CLOs that Moody’s rates had some Texas Competitive exposure, including eight with 20% or more exposure.
“Many CLO managers have elected to sell their Texas Competitive investment instead of holding it in anticipation of higher recoveries based on the outcome of the bankruptcy filing,” the report stated.
By comparison, in September 2013, more than 250 deals, or 42% of all U.S. CLOs, had exposure to Texas Competitive debt.
Energy Futures has reached an agreement with creditors to restructure nearly $40 billion in outstanding debt, but it is has not been able to avoid a dispute with some junior creditors, who are demanding a better recovery. Moody’s noted in research published last month that the Texas Competitive Electric Holdings has approximately $30 billion in debt but only $15 billion in value, presenting the prospect of heavy losses to lenders.
Energy Future was the largest member of the buyout class of the 2006-2007; a consortium led by Kohlberg Kravis Roberts, TPG Capital and Goldman Sachs took it private for $45 billion, hoping that natural gas prices would go up, allowing the utility to grow its way out of debt. Instead natural gas prices declined and have remained low, causing the company to struggle with its debt for years
The restructuring agreement announced April 29 includes $4.475 billion of debtor-in-possession financing for Texas Competitive Electrical Holdings.
Moody’s does not expect many more CLO managers to trade out of the credit.
CLO 2.0s, or those issued after the financial crisis, again reported no defaults in January.