After updating rating criteria for U.S. collateralized loan obligations (CLOs), Fitch Ratings has moved to upgrade and affirm a majority of the notes.
Of the 65 notes from 35 broadly syndicated loan CLOs, 77% of them were upgraded and 17% were affirmed. The rest of the CLOs were repaid. Most of the actions were ‘AA’ rating level, including plus or minus, with five of the notes having previously been at the level upgraded to ‘AAA’, and the rest moving up a notch.
Among the 13 non-investment-grade notes that Fitch reviewed, all except for one was upgraded by at least one notch.
There were 37 notes from eight middle market CLOs that were under critical observation; 97% were upgraded and 3% were affirmed. All of the 15 notes under investment-grade were upgraded except for one, with the minimum increase being three notches.
Fitch noted that credit quality across CLO portfolios has improved since 2021. Weak asset exposure has decreased to 6.2% at the end of January 2022 from 7.4% at the end of 2021. Such a movement has supported an improvement to the Fitch weighted average rating factor to an average of 24.9 from 25.2, over the same period.
“Improvements to credit quality has enabled overcollateralization cushions to thicken,” Fitch said, adding “many CLOs have notes with improving break-even default rates.”
The rating agency also noted that amortizations of some reviewed CLOs also qualified for positive rating actions, especially those out of reinvestment, including four tranches of Apres Static CLO 1. Since the last review, Fitch noted, the class X notes had been paid in full, and an additional 18.5% of the original class A-1-R note balance had been amortized. This impacted the notes by increasing credit enhancement levels and total amortization of 37% for the senior notes.
