The AUM for U.S. dollar (USD) collateralized loan obligations increased by 5% in third quarter 2021 and 17% through September, when new issuance already exceeded the volume for all of 2020, according to Fitch Ratings.
Fitch reported that in the third quarter there were 84 new or reissued broadly syndicated loan (BSL) CLOs in U.S. that priced $41.8 billion in notes and equity, up from 80 BSL CLOs totaling $38.7 billion in the previous quarter. The rating agency adds that third quarter volume was well above last year’s $21.2 billion from 50 CLOs during the same period, when market activity resumed after briefly pausing due to pandemic-related uncertainty.
Through the third quarter, $115 billion in CLOs closed, compared to $80 billion last year over the same period.
Reset and refinancing activity was also strong in the U.S. CLO market, with 62 BSL transactions resetting and 49 refinancing during the quarter. Those transactions, however, provided managers with less spread reduction, which averaged 26 basis points in the third quarter for the senior-most notes, down from 31 basis points in the previous quarter, and 46 basis points in the first quarter.
Spreads on those senior-most notes have remained within a narrow band this year, Fitch says, with new and reissued BSL CLOs in the third quarter pricing at 118 basis points, compared to 116 basis points last quarter and 114 basis points in the first quarter.
“These averages are well below last year's, which spiked at 191bps in the second quarter of 2020,” Fitch says.
Fitch updated its CLOs and Corporate CDOs rating criteria Sept. 17, prompting the rating agency to place 102 tranches from 43 CLOs in the U.S. under criteria observation. As of Oct. 15, two notes from two CLOs have been upgraded, one to AAA sf from AAssf, and the other to Bsf from B-sf.
The rating agency notes that the new criteria update the base-case probability of default assumption and some industry classifications to reflect current markets, and shorten the evaluated risk horizon, among other adjustments. As a result, Fitch’s weighted average rating factor (WARF) values now reflect the new 10-year asset default rate used in its portfolio credit model, and they make a differentiation within the ‘CCC’ level, which was not in the previous criteria.
Fitch also eliminated the rating factor for rating levels at ‘CC’, ‘C’, and ‘D,’ reflecting the view that borrowers at these rating levels are generally considered defaulted.
