CLO Exposure to Riskier Loans Nudged Higher in April

According to Fitch Ratings, exposure to “concern” loans, or those rated CCC+ and below, increased last month in US broadly syndicated CLOs it monitors.

The percentage of US BSL CLOs that were exposed to issuers of “top market concern loans” climbed from 7.0% in March to 7.4% in April. The default rate for CLOs remained constant at 0.7%.

“The [concern loans] list has grown as tightening credit markets and operational challenges increase default risk for portfolio loan issuers,” the agency said.

In its universe of tracked agreements, Fitch claimed that new-issue CLOs provide the strongest metrics. For new CLOs, exposure to loans rated CCC+ or below was just 2.5% in April, and the new transactions had overcollateralization test cushions for senior and junior deals that averaged 10.2% and 5.3%, respectively.

Last month, the overcollateralization test cushions for reinvesting CLOs were 8.6% (senior) and 3.5% (junior), which is a modest decrease from the corresponding levels from a year ago.

As refinancing/reset options remain unaffordable for managers given the present market-spread circumstances, the number of CLOs departing reinvestment periods continues to rise, with new issue triple-A coupons priced in a range of 183 and 225 bps above Sofr during the previous 30 days. According to Fitch, 33% of the CLOs it tracks are no longer eligible for reinvestment.

Notably, 59% of CLOs that were not in reinvestment and 3% of those that were failing required weighted average life covenants in April.