S&P: Ratings On Five Tranches From Four U. S. CLO Transactions Placed On CreditWatch Negative
Since the beginning of this year, reinvesting CLO transactions have experienced increased exposure to defaulted obligors as the global corporate default tally continues to climb (see "The U. S. Speculative-Grade Corporate Default Rate Increased To 4.5% In July," published Aug. 1, 2016). This increase in defaults has contributed to declines in the transactions' overcollateralization (O/C) ratios since December 2015:
Avery Point II CLO Ltd: The class E O/C ratio was 105.92% as of the July 2016 monthly report, down from 107.20% in December 2015.BNPP IP CLO 2014-1 Ltd.: The class E O/C ratio was 103.25% as of the July 2016 monthly report, down from 104.03% in December 2015. Limerock CLO II Ltd.: The class E O/C ratio was 106.63% as of the July 2016 monthly report, down slightly from 106.80% in December 2015.Among several reinvesting CLO 2.0s, exposures to assets rated 'BB-' and above have increased since the start of the year. Despite the reinvestment into 'BB' rated assets, downgrades and defaults continue, causing the 'CCC' rated and defaulted buckets for several transactions to increase. The increase in 'BB' rated assets may benefit the senior and mezzanine CLO notes; however, the slight decline in O/C, the increase in 'CCC' rated and defaulted buckets, and the decline in weighted average spread strain the subordinate 'B' rated CLO notes. Therefore, we placed our 'B (sf)' ratings from each of the three transactions listed above on CreditWatch with negative implications because we believe the credit support available to these notes may no longer be commensurate with their current ratings.
Among the amortizing CLO 1.0s, percentage exposures to defaulted and long-dated assets have started to rise, increasing concentration risks for the subordinate notes of some transactions as they approach their legal final maturities. We placed our 'BB+ (sf)' ratings from Jasper CLO Ltd. on CreditWatch with negative implications because we believe the credit support available to these notes may no longer be commensurate with their current ratings due to an increase in the percentage exposure to long-dated assets.
The affected tranches are subordinate within their respective capital structures and therefore more vulnerable to distressed market conditions and losses from the underlying collateral. The affected transactions also have significant exposure to assets from companies with an S&P Global Ratings corporate rating with a negative outlook, assets from distressed sectors, and assets currently trading at distressed prices. These negative factors also contributed to our CreditWatch actions.
We expect to resolve today's CreditWatch negative placements within 90 days after we complete a cash flow analysis and committee review. We will continue to monitor these transactions and we will take rating actions, including CreditWatch placements, as we deem appropriate.