Secondary market volume lighter as CBO/CDO/CLO prices improve; CLO tranches downgraded

By Cristal Cody

Tupelo, Miss., April 14 – After weeks of heavy trading volume in high-grade CBO/CDO/CLO securities, secondary activity subsided on Monday while prices climbed.

Investment-grade secondary market trading volume totaled $242.51 million on Monday, while another $76.28 million of lower-rated issues traded, Trace data shows.

Average prices hit 92 on investment-grade paper and 72.90 for the non-high-grade securities.

In the same session a week ago, $666.03 million of high-grade CBO/CDO/CLO issues traded at an average 86.90 price, while $127.1 million of non-high-grade securities traded at an average 59.10.

In other activity, downgrades continued for broadly syndicated CLOs on Tuesday in response to the economic fallout caused by the coronavirus pandemic.

S&P Global Ratings dropped the ratings on the class E-R notes from Mountain View CLO 2013-1 Ltd., which was refinanced in 2017, to B- from BB-.

S&P also downgraded two tranches from Marathon CLO V Ltd., which was first priced in 2013 and refinanced in 2017. The class C-R notes were dropped to BB+ from BBB- and the D-R tranche was downgraded to B- from BB-.

Fitch Ratings announced on Tuesday that it placed the class E deferrable floating-rate notes (BB-) issued by Madison Park Funding XXXIV, Ltd. on Rating Watch negative.

Credit Suisse Asset Management, LLC priced $503.3 million of notes in the transaction a year ago in an offering issued April 25, 2019. The CLO sold $21.3 million of the class E notes at Libor plus 675 basis points.

Since March, S&P and Fitch Ratings have placed about 100 CLO bond tranches on negative watch, BofA Securities, Inc. analysts said in a note on Tuesday.

“The vast majority of these deals were initially rated BB/B and there are 8 IG-rated tranches (mostly BBB),” the BofA analysts said. “BBB bonds continue to face a high risk of downgrade in the near term considering the increasing CCC share and the recent uptick in defaults.”

Many CLO deal documents initiate a restricted trading condition if any investment-grade-rated bond is downgraded, according to the report.

“This will further limit manager's ability to trade in/out of loans,” the analysts said. “Based on past downgrade trends for CLO 2.0 bonds, we identified at least 45 deals at high risk of downgrade based on WARF /WAS/CCC and [junior] OC changes since the first payment date.”

April payment reports have started to be released, and the first 2.0 CLO deal breached the senior most AAA/AA OC test, the BofA report said.

“We estimate 20-30% of deals could potentially breach their OC ratios although manager trading activity could mitigate this,” the analysts said. “We think further OC breaches are likely to occur as we continue to monitor deals that make their payment in April. With the estimated CCC share reaching 10.5%, we estimate 20-30% of deals could breach their junior OC tests.”

Looking at the middle-market CLO space, month-over-month median Caa exposure has increased 1.5 points while median CCC exposure has remained relatively stable, according to a Wells Fargo Securities, LLC research note on Tuesday.

“In general, we think MM CLO deal metrics may be slower to react to the effects of the Covid-19-related stress,” Wells Fargo analysts said. “Even in the BSL CLO sector, most CLO deal statistics (with the exception of market value metrics) do not yet show a large amount of stress.”

Based on March trustee reports, middle-market CLO CCC/Caa baskets stand at 11.0% and 13.6%, while the limits typically are in the 15% to 17.5% range, according to the note.

“We believe very few middle market loans deferred interest payments in Q1 2020,” the Wells Fargo analysts said. “However, we expect to see a bigger uptick in loans deferring interest in Q2 2020.”

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