Moody’s Reviewing 22bln of CLO Bonds: Expected Losses “increased materially”

by cmbscredit

Credit spreads are going to be a death blow for a lot of borrowers. CLOs has fueled the leveraged loan markets for the last decade.

from Bloomberg

Moody’s May Cut $22 Billlion of CLO Bonds on Pandemic Losses (1)
2020-04-18 01:41:09.111 GMT

By Lisa Lee
(Bloomberg) — Moody’s Investors Service said it may cut
the ratings on $22 billion of U.S. collateralized loan
obligations — a fifth of all such bonds it grades — after the
Covid-19 pandemic eroded the financial standing of American
companies backed by the securities.
The ratings firm took the action on 859 bonds from 358 CLOs
that package leveraged loans into securities of varying degrees
of risk and return, according to a statement late Friday. The
step — which affects about 19% of Moody’s-rated CLOs that
purchase broadly syndicated loans — comes as the underlying
debt gets downgraded at a record pace.
Expected losses on the CLO securities Moody’s rates have
“increased materially,” it said. The pandemic has erased
earnings at businesses, leading credit quality to deteriorate.
More than 40% of the bonds on review have an investment-grade
rating, with 13 rated A, and 355 rated at the Baa level. The
rest have sub-investment ratings through to CCC.
CLOs are the biggest buyers in the $1.2 trillion leveraged
loan market, which in recent years fueled a boom in debt-fueled
buyouts and other transactions. But the loans have been
particularly hard-hit in the market rout triggered by the
pandemic, with a benchmark index plunging last month to the
lowest level since the global financial crisis. The index has
recovered some of its losses in recent weeks.
The extent of losses that CLO bonds incur depends on the
deals’ exposure to downgrades and other negative ratings actions
on the underlying loans, as well as the bonds’ priority in the
capital structure. How much cushion the bonds have either from
asset coverage or cash flow diverted from riskier debt that sits
below them is also a factor.
Read More: Why Leveraged Loans, CLOs Feed Worries in Virus
Slump
Moody’s said it usually tries to conclude its ratings
reviews within 90 days, but the “high degree of uncertainty” of
the current environment may mean it takes longer.
The step by Moody’s comes as S&P Global Ratings also on
Friday put 155 CLO bonds on review out of 113 deals in their
reinvestment period, or actively trading their portfolios,
accounting for about 6.3% of its rated CLO securities.