Credit deterioration is slowing in broadly syndicated CLOs – but a large percentage of deals are still failing certain performance tests under the weight of underlying asset downgrades and lower payment flows from obligors.
In its weekly securitization research reports, Deutsche Bank and Wells Fargo each noted a decelerating pace of deterioration in CLO credit quality, compared to April’s rapid surge of deals that faced failing overcollateralization tests.
Deutsch noted that 36% of U.S. collateralized loan obligations – or 424 out of an estimated 1,215 outstanding deals – are failing at least one overcollateralization test due to the large-scale downgrades to leveraged loans held in portfolios.
For deals that are passed the reinvestment period – when managers can buy and sell loans from the portfolio to improve its credit standing – the number of deals failing is a whopping 69%.
But that rate of OC erosion is decelerating, according to Deutsche. The 424 deals failing at least one test as of May 20 was up from 309, or 27% of deals outstanding – which itself was more than six-fold the total from March 20 when only 5% of deals (or 51 total) were experiencing OC trouble.
The decline in the minimum collateral cushion for CLOs fell to 156 basis points from 255 basis points a month ago; that followed a steeper decline from 383 basis points in March, according to Wells. The percentage of deals with excessive levels of exposure to CCC-rated loans rose to 10.6% in May, compared to 8.7% in April – which itself had more than doubled the 4% level from March.
Issuance picked up in May with 15 deals totaling $5.5 billion, more than 54% above April’s level as the pandemic’s economic impact took hold.
May’s priced deals bring year-to-date volume of new-issue CLOs to $27 billion across 59 CLOs. That is about half of last year’s volume and deal count year-to-date, but
