Fitch looking at coronavirus impact on middle-market CLO ratings

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Fitch Ratings is evaluating all 59 middle-market collateralized loan obligations it rates for potential downgrades, over concerns of the ability of small-business borrowers to support loan payments under COVID-19 stresses.

Fitch will specifically examine whether the CLOs will suffer enough declining payments and worsening credit profiles of troubled middle-market obligors.

Fitch’s review will incorporate the coronavirus pandemic’s impact on company financials – which it believes will include particularly steep declines for the most vulnerable industries from the economic impact of the outbreak, such as energy, lodging, restaurants and retail.

Fitch said it will use adjusted financial forecasts to update the “point-in-time” credit opinion of the private borrowers – which determines about 80% of a middle-market CLO’s overall credit quality, according to the ratings agency.

“Consequently, the MM CLO notes will be evaluated to determine whether rating changes are required at this time,” according to a Fitch release.

Fitch rates 127 CLO notes across the deals it rates, all of which are directed by 17 different asset managers.

Fitch’s analysis will employ a projected decline in forecasted earnings between 2019 and 2021. Fitch says that amount will vary by individual company, impacted by analysts’ judgement over the “reasonableness” of any adjustment, but the “straight-average decline” of earnings is expected to be 15% across all sectors, and 13% for industries excluding oil and gas.

Fitch has an expected 30% straight-average decline for what it considers highly impacted sectors for the pandemic: energy oil and gas; metals and mining; gaming, leisure and entertainment; lodging and restaurants; retail; building materials and business services. (That adjustment is a 24% decline when excluding energy oil and gas).

For moderately impacted sectors, the decline is 12%. Those industries include textiles and furniture; transportation and distribution; healthcare; computer and electronics; automobiles; aerospace and defense; industrial and manufacturing; chemicals; environmental services; packaging and containers; and paper and forest products,

The expected earnings decline is only 5% for the “modestly” impacted sectors including utilities and power; food, beverage and tobacco; consumer products; farming and agriculture services; real estate; cable; telecommunications; pharmaceuticals and retail food and drug.

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