Moody's adds to its mass list of CLO notes under review for downgrade

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Moody’s Investors Service added 241 additional CLO securities issued from 115 U.S. broadly syndicated loan portfolios to its downgrade watch list, adding to the 859 collateralized loan obligation tranches that were placed under review by Moody’s in April.

Moody’s cited the “continuing decline in the credit quality of CLO portfolios” stemming from the economic shocks of the coronavirus pandemic.

“Since April, the decline in corporate credit has resulted in a significant number of downgrades among the assets underlying some CLOs,” a Moody’s press release stated on Wednesday.

The lower ratings on assets affect CLOs by worsening the minimum average rating numbers for the portfolio (or the weighted average ratings factor) and decreasing the level of overcollateralization protection on the notes. The downgrades are also stretching out the volume of Caa (or triple-C) rated assets in CLO portfolios, most of which are contractually limited to 7.5% of the portfolio’s total value.

The total number of U.S. CLO securities under possible downgrade threat total more than 1,100. or approximately a quarter of all oustanding CLO notes. The notes also involve a miniscule level of CLO portfolio values, as none of the notes under review involve the triple-A bonds that banks, insurance companies and other high-grade investors purchase – and which make up the bulk of CLO note offerings.

But the new batch of securities under review does involve several dozen investment-grade notes. The review list includes eight securities rated Aa2 (Moody’s equivalent of AA), 51 that are ranted A1 through A3 (single-A), and 59 in the Baa1-Baa3 tier (or BBB). More than 93% of the CLO securities now under review by Moody’s are rated Baa1 or below.

The remaining 123 are in Moody’s double-B, single-B and Caa- rated categories – typically the lowest rated tranche in most CLOs that lie in first-loss position in the event of payment shortfalls to investors.

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