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CLOs: Coronavirus impact on leveraged loans and CLOs

| March 6, 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.

Energy, metals and mining, airlines, travel services and gaming look like the businesses most vulnerable to the economic impact of coronavirus, according to Fitch. Leveraged issuers in these areas will have to rely on liquidity buffers in the short term and operational flexibility in the long term to manage a potential drop in consumer demand from the virus. The impact on CLOs should clearly vary based on their exposure to these and other effected sectors. But CLO managers can limit their exposure to potential downgrades through diversification and by holding the stronger names across sectors. Only 12% of the aggregate US BSL CLO portfolio are loans in the highly affected sectors, and 94% of these loans are rated ‘B-’ or better. The average junior overcollateralization for BSL CLOs with more than 15% exposure to the most affected sectors is still healthy at 4.2%. The Fitch article is here. Sources: Fitch, APS.

Exhibit 1: Relative impact of coronavirus on US corporate sectors

Source: Fitch, APS

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