CBO/CDO/CLOs gain; some CLOs vulnerable to pandemic impact; loan default forecast rises

By Cristal Cody

Tupelo, Miss., April 1 – In CLO market action, secondary volume remains strong while prices are increasing.

Secondary volume ramped up to $1.03 billion on Tuesday from $659.65 million in investment-grade CBO/CDO/CLO securities, according to Trace data.

Volume in lower-rated securities declined to $140.88 million on Tuesday from $225.72 million at the start of the week.

Average prices for high-grade paper improved to 90.90 on Tuesday from 89.20 on Monday.

Lower-rated CBO/CDO/CLO also improved to an average price of 60.30 in the prior session from 60.20 on Monday.

The primary market remains quiet so far in the wake of the coronavirus pandemic.

“The economic fallout from the spread of coronavirus and oil price shock will weaken the credit quality and performance of most collateralized loan obligation rated by Moody's Investors Service,” Moody’s said in a report released Wednesday. “The rating agency now projects severe cumulative contractions of the U.S. economy in 2020 with a strong overall recovery in 2021.”

Moody’s said it now projects cumulative contractions of over the first and second quarters of 4.3%.

The economic fallout will mostly affect CLOs with weak issuers in vulnerable sectors with already weak credit quality and those with near-term financing needs, Moody’s said.

CLO sectors most affected include hotel, gaming and leisure, as well as business services.

Roughly 14% of CLO collateral is in sectors highly vulnerable to economic fallout from coronavirus, with another 53% in moderately vulnerable sectors, Moody’s said.

Since early March, Moody’s said it has taken negative actions on over 200 CLO-held issuers, including 47% of CLO-held par from sectors highly vulnerable to coronavirus or oil price shock and 43% of par from moderately vulnerable sectors, representing approximately $61 billion, or 13%, of total CLO collateral par.

“Anecdotal evidence indicates that some CLO managers are attempting to reposition their portfolios, albeit amidst challenging secondary market liquidity, into higher credit quality assets and more liquid loans, at lower purchase prices,” Moody’s said.

“Such trades would potentially lead to WARF improvement and lower Caa asset exposure, at the expense of spread,” according to the report. “A few managers are attempting to increase diversity and reduce their holdings of highly vulnerable sectors; however, most managers still retain some exposures since complete divestment under current market conditions will require realization of significant par erosion.”

Meanwhile, Fitch Ratings said it has raised its 2020 institutional term loan and 2020 U.S. high-yield default rate forecast both to 5% and 6% from 3% and 3.5%, respectively, in response to the pandemic impact.

“This translates to roughly $80 billion of leveraged loan volume, doubling the amount originally anticipated this year,” Fitch said.

© 2015 Prospect News.
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