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CLOs: Exposure to ‘B-’ loans ends 2019 at 12-year high of 20%

| February 4, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

The average CLO exposure to ‘B-’ loans ended 2019 at a 12-year high of 20%, according to S&P, up from 15% the year before.  About 100 issuers saw their ratings lowered last year to ‘B-,’ bringing total ‘B-‘ issuers in December to 376. CLOs have an outsized exposure to ‘B’ and ‘B-’ loans at more than 5% above the share of the S&P/LSTA index. CLO exposure to ‘CCC’ loans has not moved up significantly, rising to 5.5% last year from 5.2% a year earlier. The average CLO has a ‘CCC’ bucket of around 4.6%, well below the typical 7.5% ‘CCC’ limit.  Amortizing CLO 2.0s look more susceptible to OC fluctuations as stronger loans repay and portfolios become more concentrated in ‘CCC.’ In a latest credit update from S&P, 19 amortizing CLOs are failing OC tests while five amortizing CLOs have less than 25 bp of cushion for their most junior tranches. (S&P, APS)

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