2017 Annual Global Leveraged Loan CLO Default Study And Rating Transitions 2017 Annual

62 Pages·2017·1.03 MB·English

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GLOBALFIXEDINCOMERESEARCH
KeyTakeaways AndrewHSouth
London
Defaults:Annualdefaultrateremainslow (44)20-7176-3712
andrew.south
- WeloweredsevenglobalCLOratingsto'D'in2017,foranoveralldefaultrateof @spglobal.com
0.16%--onparwith0.17%in2016.
- Thisputsthe2017defaultrateabovetheone-yearaveragedefaultrateof0.09%.
Ratingtransitions:Upgraderatefalls,butstillstronglyexceedsdowngraderatein2017
- Ofthe4,350globalCLOratingsoutstandingatthestartof2017,weraisedorleft
unchanged99.1%andlowered0.9%.Thiscompareswith99.4%and0.6%,respectively,
in2016.
- Weraised8.2%ofratingsin2017,downfrom19.2%in2016,making2017thefirstyear
since2010withoutadouble-digitupgraderateintheCLOsector.
- The2017downgraderateof0.9%wasupslightlyfrom0.6%in2016,butstillmuchlower
thanthelong-termone-yearaveragedowngraderateof8.3%.
- Theaveragechangeincreditqualitydeclinedto+0.17notchesin2017,comparedwith
+0.41notchesin2016.
Regionandvintagebreakdown:UpgraderatehighestinEuropeandpre-crisis
transactions
- ForEuropeanCLOs,theupgraderatewas15.3%in2017,comparedwith6.3%intheU.S.
- So-called"CLO1.0"transactions(originatedbefore2010),accountedformostofthe
upgrades,withanupgraderateof19.9%.
- Sixofthesevendefaultsin2017wereinpre-2006vintageEuropeantransactions,with
onedefaultina2006vintageU.S.CLO.
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Default, Transition, and Recovery: 2017 Annual Global Leveraged Loan CLO Default Study And Rating Transitions
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Default, Transition, and Recovery: 2017 Annual Global Leveraged Loan CLO Default Study And Rating Transitions
In2017,theratingsongloballeveragedloancollateralizedloanobligations(CLOs)generally
movedhigher,consistentwiththetrendoftheprevioussixyears.Theupgraderateremained
elevatedwhiletherewerefewdowngradesanddefaults.
S&PGlobalRatingshadmorethan4,300ratingsoutstandingonleveragedloanCLOsgloballyat
thebeginningof2017.Ofthesesecurities,onlysevendefaultedduringtheyear,givingadefault
rateof0.16%.Thedowngraderateremainedlowat0.9%in2017,upslightlyfrom0.6%in2016.
Meanwhile,theupgraderatedecreasedto8.2%in2017,from19.2%in2016.Combiningupgrades
anddowngradeswiththeirseverity,weraisedourratingsonglobalCLOsbyanaverageof0.17
notchesonaggregate.
ThetrendofnetupwardratingmovementsinthegloballeveragedloanCLOsectorhasnowbeen
inplaceforseveralyears.Since2011,thedowngraderatehasremainedbelow2.5%,whilethe
annualupgraderatehasoftenbeeninthedoubledigits.Thebroadtrendofpositiveratings
performanceoverthistimeframehasbeensimilaracrossboththeU.S.andEuropeanmarkets.
UpgradesContinueToOutpaceDowngradesIn2017
Bymostmetrics,theoverallperformanceofglobalCLOsecuritiesthatweratewaspositivein
2017.Duringtheyear,weraised8.2%ofourratingsonglobalCLOsecuritiesthatwere
outstandingatthebeginningoftheyear(seechart1,below).Thiswasdownfrom19.2%inthe
previousyear,althoughthenumberofupgradesstillexceededthenumberofdowngradesbya
largemargin--atrendthathascontinuedsince2011.
The12-monthtrailingaveragechangeincreditquality(seedefinitioninAppendixI)forglobalCLOs
was+0.17ratingnotchesattheendof2017.Thismeasurehasbeenpositivesince2011,
indicatingthat,onaverage,CLOratingshavebeendriftinghigherformanyyears.
Thedefaultrateof0.16%in2017wasonparwiththepreviousyearandabovetheone-year
weighted-averagedefaultrateof0.09%.However,thedefaultrateremainslowcomparedwith
someotherstructuredfinancesectors,suchasresidentialmortgage-backedsecurities.Annual
CLOdefaultrateshavebeenlowandgenerallysteadythroughoutthesector'shistory,withno
annualdefaultratesofarexceeding0.5%(seechart2).Therewerenodefaultson
investment-gradeCLOratingsin2017.Thedefaultrateonspeculative-gradeCLOtrancheswas
0.75%,althoughthiswasequivalenttoonlysevendefaultsamong934speculative-graderatings
outstandingatthebeginningoftheyear.
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Default, Transition, and Recovery: 2017 Annual Global Leveraged Loan CLO Default Study And Rating Transitions
Chart1
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Default, Transition, and Recovery: 2017 Annual Global Leveraged Loan CLO Default Study And Rating Transitions
Chart2
CLOcreditperformancein2017differedsomewhatbetweentheU.S.andEurope.EuropeanCLOs
sawahigherupgraderateof15.3%andadowngraderateof3.3%,withratingsrisingbyan
averageof0.25notchesovertheyear.U.S.transactionssawalowerupgraderateof6.3%,but
alsoalowerdowngraderateofonly0.2%andanaverageincreaseincreditqualityof0.15notches.
Inbothcases,downgraderateswerewellbelowtheirone-yearweighted-averages.Wethinkthe
lowerupgraderateforU.S.CLOsreflectsthelargenumberofCLOresetsthathaveoccurredin
thatregion,reducingthenumberofoutstandingtransactionsthatareenteringtheiramortization
periods,whichoftenleadstoupgradesastheseniornotespaydown.
Creditperformancecontinuestodifferbytheyearofissuance--orvintage--ofCLOsecurities.The
fundamentalcreditcharacteristicsandeconomicenvironmentofatransaction'svintagecan
influenceitssubsequentcreditbehavior.SegmentingglobalCLOcreditperformanceby
transactionvintagerevealsthattheupgraderatein2017washighestforthe2011vintage,
generallyduetotransactionsdeleveraging(seechart3).WealsosegmentCLOtransactionsinto
so-called"1.0"and"2.0"generations,generallyreferringtotransactionsoriginatedbeforeand
afterthe2008-2009financialcrisis,respectively.Forthesepurposes,weconsiderCLO2.0
transactionstobethoseissuedsincethebeginningof2010,designatingthoseissuedin2009or
earlierasCLO1.0transactions.Aggregatingacrossvintagesintothe1.0and2.0generations,we
notethattherehadnotbeenanyCLO2.0tranchedefaultsasofmid-2018.Theupgraderatefor
1.0transactionswas19.9%,comparedwith4.1%for2.0transactions.
In2017,thedowngraderatewashighestamongtransactionsfromthepre-2005vintages,
althoughthistransitionrateisbasedonasmalluniverseofonly10ratingsoutstanding.By
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Default, Transition, and Recovery: 2017 Annual Global Leveraged Loan CLO Default Study And Rating Transitions
contrast,thedowngraderatewasclosetozeroforpost-2005vintages.Similarly,theonlyCLO
defaultsin2017werein2004-2006vintagetransactions.Higherdefaultratesinearliervintages
arepartlyduetosurvivalbias,inourview.Thosesecuritiesfromearliervintagetransactionsthat
performedwellwillincreasinglyhavepaidoffbynow,exitingthepoolofratingsconsideredinthe
2017performancestatistics.Thosethatremaininthepoolarethereforeincreasinglythosethat
haveshownweakerperformancetodate.Inaddition,theunderlyingcollateralpoolsinsome
earliervintagetransactionsnowcontainonlyahandfulofloans,increasingidiosyncraticrisk.
WeanticipatethatthelinkbetweenCLOtransactionvintageandratingsmovementsmaybecome
lessclearinthefuture.ThisisbecausemanyCLOsarenowbeingrestructuredafewyearsafter
issuance,throughaso-called"reset"or"refinancing".Inourratingsperformancedata,wetreat
CLOresetsandrefinancingsasnewtransactionswhosevintageisbasedontheyearinwhichthe
restructuringtookplace.Therefore,twotransactionsfromthesamevintagemaynowpotentially
exhibitsignificantlydifferentunderlyingcollateralandstructuralcharacteristicsifoneisa
completelynewtransactionbuttheotherisarefinancingorresetofanoldertransaction.This
couldmeanthereislesshomogeneityincreditperformancewithinagivenvintageinthefuture.
Chart3
AcrossglobalCLOs,downgraderatesin2017weresomewhatdifferentiatedbyratinglevelatthe
beginningoftheyear,thoughtheabsolutenumbersofdowngradeswerelow.Broadlyspeaking,
downgraderateswerehigherforlowerratingcategories,withadowngraderateof3.1%for
securitiesrated'BB'atthebeginningoftheyearcomparedwith20.0%forthoserated'CCC'(see
chart4).Downgraderatesinthe'BBB'andhigherratingcategorieswereallbelow0.5%.
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Default, Transition, and Recovery: 2017 Annual Global Leveraged Loan CLO Default Study And Rating Transitions
Chart4
Table1showsasummaryof2017creditperformanceforglobalCLOssegmentedinvariousways
andcomparedwiththe1997-2017one-yearweighted-averagestatistics.
Table1
GlobalCLOTransitionAndDefaultSummary
2017vs.one-yearaverage
2017 One-yearaverage
Ratings Stable Upgrades Downgrades* Defaults Defaults Stable Upgrades Downgrades* Defaults
(no.) (%) (%) (%) (%) (no.) (%) (%) (%) (%)
Overall 4,350 90.9 8.2 0.9 0.2 7 76.6 15.1 8.3 0.1
Region
U.S. 3,423 93.5 6.3 0.2 0.0 1 78.5 14.3 7.2 0.1
Europe 927 81.3 15.3 3.3 0.6 6 70.4 17.8 11.8 0.1
Generation
1.0 1,126 77.0 19.9 3.1 0.6 7 72.1 17.6 10.3 0.1
2.0 3,224 95.8 4.1 0.1 0.0 0 94.9 4.9 0.1 0.0
Vintage
Pre-2005 10 60.0 0.0 40.0 30.0 3 82.9 9.2 7.9 0.3
2005 49 69.4 12.2 18.4 6.1 3 71.8 17.5 10.7 0.0
2006 310 80.3 17.4 2.3 0.3 1 68.8 20.1 11.1 0.1
2007 741 76.9 21.1 2.0 0.0 0 66.6 22.4 11.0 0.0
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Default, Transition, and Recovery: 2017 Annual Global Leveraged Loan CLO Default Study And Rating Transitions
Table1
GlobalCLOTransitionAndDefaultSummary (cont.)
2017vs.one-yearaverage
2017 One-yearaverage
Ratings Stable Upgrades Downgrades* Defaults Defaults Stable Upgrades Downgrades* Defaults
(no.) (%) (%) (%) (%) (no.) (%) (%) (%) (%)
Overall 4,350 90.9 8.2 0.9 0.2 7 76.6 15.1 8.3 0.1
2008 15 46.7 53.3 0.0 0.0 0 65.7 20.3 13.9 0.4
2009 1 100.0 0.0 0.0 0.0 0 64.4 28.7 6.9 0.0
2010 1 100.0 0.0 0.0 0.0 0 87.0 13.0 0.0 0.0
2011 12 33.3 66.7 0.0 0.0 0 84.6 15.4 0.0 0.0
2012 213 79.8 20.2 0.0 0.0 0 92.5 7.5 0.0 0.0
2013 896 97.3 2.6 0.1 0.0 0 95.2 4.6 0.2 0.0
2014 783 96.3 3.3 0.4 0.0 0 97.2 2.5 0.3 0.0
2015 555 95.9 4.1 0.0 0.0 0 97.4 2.6 0.0 0.0
2016 764 98.7 1.3 0.0 0.0 0 98.7 1.3 0.0 0.0
Ratingcategory
AAA 1,227 100.0 N/A 0.0 0.0 0 90.3 N/A 9.7 0.0
AA 918 84.3 15.7 0.0 0.0 0 70.9 23.6 5.5 0.0
A 662 87.0 12.7 0.3 0.0 0 72.0 19.7 8.3 0.0
BBB 609 89.0 10.5 0.5 0.0 0 73.4 16.9 9.7 0.0
BB 612 89.5 7.4 3.1 0.0 0 75.7 14.9 9.4 0.0
B 284 94.0 3.9 2.1 0.4 1 71.3 21.9 6.9 0.1
CCC 35 54.3 25.7 20.0 11.4 4 59.9 35.1 5.0 1.0
CC 3 33.3 0.0 66.7 66.7 2 66.0 5.2 28.9 28.9
Ratinggrade
Investment-grade 3,416 91.3 8.5 0.1 0.0 0 77.8 13.9 8.3 0.0
Speculative-grade 934 89.4 7.0 3.6 0.7 7 72.1 19.6 8.3 0.4
*Includingdefaults.Securitieswhoseratingsmigratedto'NR'overtheperiodareclassifiedbasedontheirratingpriorto'NR'.N/A--Notapplicable.Source:S&P
GlobalFixedIncomeResearch.
CLORatingsHaveDifferentiatedDefaultRatesOverTime
Lookingbackfurther,globalCLOshavehistoricallyexhibitedstrongcreditperformance,withfew
defaults.AttheendofJune2018,wehadissuedover12,500ratingsonCLOsecurities.The
majorityofthesetrancheshavesincebeenpaidinfullandtheratingsonthemhavebeen
withdrawn.Fewerthan0.5%ofthetrancheshavedefaultedandhadratingsloweredto'D'(see
table2).(FurtherdetailsofCLOtrancheswithratingsthatweloweredto'D'arelistedintable8of
AppendixII,andtrancheswithratingsof'CC'asofmid-2018areshownintable9.)
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Default, Transition, and Recovery: 2017 Annual Global Leveraged Loan CLO Default Study And Rating Transitions
Table2
GlobalCLOLifetimeTransitionAndDefaultSummary
1996-Q22018
Ratings Stable Upgrades Downgrades* Defaults Defaults Withdrawals
(no.) (%) (%) (%) (%) (no.) (%)
Overall 12,514 68.3 23.7 8.0 0.5 57 72.1
Region
U.S. 10,048 70.2 24.4 5.4 0.4 38 73.0
Europe 2,466 60.5 21.1 18.4 0.8 19 68.8
Generation
1.0 5,765 41.3 41.7 17.0 1.0 57 97.6
2.0 6,749 91.4 8.3 0.3 0.0 0 50.3
Vintage
Pre-2005 1,669 56.9 24.7 18.4 2.2 37 97.7
2005 744 36.2 47.7 16.1 0.4 3 99.6
2006 1,505 35.7 48.8 15.5 0.7 10 96.7
2007 1,521 33.9 51.6 14.5 0.1 2 97.9
2008 298 34.2 33.9 31.9 1.7 5 95.6
2009 28 21.4 64.3 14.3 0.0 0 100.0
2010 33 60.6 39.4 0.0 0.0 0 100.0
2011 154 51.9 48.1 0.0 0.0 0 100.0
2012 629 75.4 24.6 0.0 0.0 0 97.6
2013 1,105 80.5 18.6 0.8 0.0 0 88.7
2014 887 92.1 7.1 0.8 0.0 0 80.3
2015 586 94.9 5.1 0.0 0.0 0 81.2
2016 767 97.8 2.1 0.1 0.0 0 32.6
2017 1,691 99.7 0.3 0.0 0.0 0 10.6
2018H1 897 100.0 0.0 0.0 0.0 0 0.0
Ratingcategory
AAA 3,807 93.6 N/A 6.4 0.0 0 77.5
AA 2,296 58.4 38.7 3.0 0.0 1 70.9
A 2,221 53.5 42.5 4.0 0.2 5 73.5
BBB 2,096 51.8 35.0 13.3 0.6 12 73.5
BB 1,689 59.5 22.9 17.6 2.1 35 66.3
B 405 90.4 4.2 5.4 1.0 4 39.3
CCC 0 N/A N/A N/A N/A N/A N/A
CC 0 N/A N/A N/A N/A N/A N/A
Ratinggrade
Investment-grade 10,420 68.9 24.6 6.5 0.2 18 74.4
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Default, Transition, and Recovery: 2017 Annual Global Leveraged Loan CLO Default Study And Rating Transitions
Table2
GlobalCLOLifetimeTransitionAndDefaultSummary (cont.)
1996-Q22018
Ratings Stable Upgrades Downgrades* Defaults Defaults Withdrawals
(no.) (%) (%) (%) (%) (no.) (%)
Overall 12,514 68.3 23.7 8.0 0.5 57 72.1
Speculative-grade 2,094 65.5 19.3 15.2 1.9 39 61.0
*Includingdefaults.Securitieswhoseratingsmigratedto'NR'overtheperiodareclassifiedbasedontheirratingpriorto'NR'when
determiningstable,upgrade,downgrade,anddefaultrates.N/A--Notapplicable.Source:S&PGlobalFixedIncomeResearch.
Inordertoexploretheextenttowhichourratingshavesuccessfullyrank-orderedsecurities'
creditworthinessovertime,wecancalculatecumulativedefaultratesbyratingcategoryfor
varioustimehorizonsaswedoinourcorporatedefaultandtransitionstudies.Thisapproach
constructsaveragemultiyearcumulativedefaultratesbyfirstaggregatingacrossstaticpoolsthe
period-to-periodone-yearmarginaldefaultratesthatareconditionalonthesecurities'survival
(i.e.,non-default)inthepriorone-yearperiod(seeAppendixIformoredetails).Wenotethatthis
approachdiffersfromthecalculationsweuseinconstructingtheweighted-averagemultiyear
defaultandtransitionratesincludedelsewhereinthisstudy,wheredefaultratesarenot
conditionalonsurvival.
Thecumulativedefaultrates(conditionalonsurvival)basedonourfullannualdatahistory--from
thebeginningof1997totheendof2017--showthatlowerratingshavegenerallybeenassociated
withhigherdefaultratesandviceversa(seetable3).Inotherwords,ratingsappeartohave
successfullyrank-orderedcreditworthinessovereachtimehorizon.
Table3
GlobalCLOCumulativeDefaultRates,ConditionalOnSurvival,1997-2017(%)
Timehorizon(years)
1 2 3 4 5 6 7 8 9 10
AAA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
AA 0.00 0.01 0.02 0.03 0.04 0.06 0.08 0.11 0.11 0.11
A 0.00 0.01 0.02 0.04 0.05 0.05 0.05 0.05 0.05 0.05
BBB 0.01 0.01 0.02 0.08 0.12 0.22 0.37 0.55 0.79 1.07
BB 0.03 0.14 0.26 0.36 0.53 0.75 1.14 1.79 2.67 3.95
B 0.07 0.19 0.37 0.59 0.99 1.60 1.87 2.76 5.13 8.03
CCC 1.04 2.25 3.66 5.28 6.81 7.86 9.16 10.95 64.38 64.38
CC 28.87 43.51 51.26 53.48 54.70 54.70 54.70 54.70 54.70 N/A
IG 0.00 0.01 0.01 0.03 0.05 0.07 0.11 0.16 0.21 0.27
SG 0.42 0.83 1.26 1.69 2.18 2.62 3.15 3.90 4.94 6.27
Overall 0.09 0.19 0.28 0.39 0.51 0.62 0.75 0.91 1.11 1.35
IG--Investment-grade.SG--Speculative-grade.Source:S&PGlobalFixedIncomeResearch.
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