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S&P: CLO 'CCC' buckets fall to lowest post-COVID levels

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The average size of a U.S. CLO’s “CCC” bucket of near-default leveraged loans fell below 10% for the first time since March, indicating an improving corporate loan environment nearly eight months into the COVID-19 pandemic.

According to a report issued Tuesday by S&P Global Ratings, collateralized loan obligations rated by S&P included a 9.55% share of loans bearing the troubled triple-C rating, the lowest rating for a non-investment-grade debt above that of non-performing status.

That represents the lowest share of CCC-rated loans in CLOs since the average portion drastically increased from around 4% on March 1 to over 10% a month later at the onset of the coronavirus pandemic.

But the mark still exceeds the average 7.5% limit most CLO managers are permitted to hold under agreements with holders of CLO debt securities, including U.S. banks.

“The gradual decrease in CLO 'CCC' asset buckets reflects a stabilizing corporate loan market,” S&P’s report stated.

CLOs holding excess amounts of CCC-rated loans can fail certain quarterly performance and minimum credit-quality tests on the underlying portfolio, which ultimately could force diversion of equity cash flows toward principal payments protecting the deal’s highest AAA-rated debt securities.

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CLOs CDOs Leveraged loans Downgrades