CBO/CDO/CLOs improve; leveraged loan funds see inflows; AAA, AA notes spared downgrades

By Cristal Cody

Tupelo, Miss., April 17 – In the securitized secondary market, prices improved for high-grade CBO/CDO/CLO paper on Thursday, while lower-rated issues gained the most over the week.

On Thursday, $563.64 million of high-grade issues and $171.87 million of non-high-grade paper traded, according to Trace data.

High-grade CBO/CDO/CLO average prices were 89.30, improved from 88.40 on Wednesday but down from 92.30 on Tuesday and 92 averages on Monday.

Average prices for non-high-grade paper climbed in the previous session to its best day of the week so far at 75.80 from 67.70 on Wednesday, 70.10 on Tuesday and 72.90 at the start of the week.

Secondary market volume this week has included $683.75 million of high-grade CBO/CDO/CLO issues traded on Wednesday, $573.54 million on Tuesday and $242.51 million on Monday.

Trading volume in non-high-grade paper totaled $185.77 million on Wednesday, $424.88 million on Tuesday and $76.28 million on Monday.

In other market action, leveraged loan funds saw their first week of inflows of $29.5 million after 12 straight weeks of redemptions with $1.56 billion of outflows last week and $527.8 million of outflows for the week ended April 1, according to a Fitch Ratings report on Friday.

Static CLO notes impacted

Meanwhile, several dollar- and euro-denominated CLO tranches were added to negative rating watches on Friday by S&P Global Ratings and Fitch Ratings in response to the widespread coronavirus-related business shutdowns.

Fitch said 24 notes were put on rating watch negative and 13 notes were put out outlook negative from 14 CLOs out of the 850 broadly syndicated and middle-market CLOs it reviewed.

“There were no actions taken on AAAsf or AAsf tranches,” Fitch said.

Eight of the 12 broadly syndicated CLOs that were affected have static portfolios.

“Static CLOs may experience more rating volatility, compared to revolving transactions, in a deteriorating credit environment,” Fitch said. “While a static CLO can sell defaulted and credit-risk assets, it’s not allowed to reinvest, and therefore has limited options to offset negative rating migration and par losses expected in the current environment.”

S&P said many CLOs now have an increased exposure to loans from the CCC category.

“Global economic deterioration as a result of the spread of coronavirus is weakening the credit quality of structured finance transactions,” according to a Moody's Investors Service report released on Friday. “Some structured finance sectors are closely related to industries that have high exposure to the coronavirus outbreak. Some securitizations retain exposure to transaction sponsors whose credit strength is vulnerable to the economic shocks stemming from coronavirus.”

National and regional differences will also influence how deeply the virus's effects impact transaction performance, according to the report.

“The magnitude of shocks to asset performance will vary by asset class and by geography,” Moody's vice president Peter McNally said in a release. “And transaction structures, including a specific bond's position in the capital structure of a transaction will influence the timing and severity any credit impact.”

CLOs feature diversified portfolios of corporate assets, but their vulnerability to the coronavirus varies according to their asset concentrations in higher risk industries including hotel, gaming and leisure, automotive, consumer durables, and the oil and gas sectors, Moody’s said.

“The performance of transactions that are actively managed, such as most CLOs, can also vary along with the proficiency of the manager; CLOs, for example, can benefit from a prudent manager with sufficient corporate resources that can mitigate credit erosion in the portfolio, especially during a downturn,” the report said.

© 2015 Prospect News.
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