Fitch: Loan Defaults, Not Just Commodities for U.S. CLOs

Link to Fitch Ratings' Report: U.S. CLO Index : Loan Defaults Not Just Commodities for U.S. CLOs

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=876994

Focus on industrywide commodity-related stress may overshadow defaults of isolated non-commodity issuers that are prevalent in U.S. CLOs, according to Fitch Ratings in its latest U.S. CLO index.

One recent instance is Millennium Health LLC that filed for Chapter 11 bankruptcy in November and was held in slightly over 50 Fitch-rated CLOs. Millennium's default was the main reason behind a more than two-fold increase in the number of CLOs reporting defaulted assets from third-quarter 2015 (3Q'15). Millennium Health is an example of how an idiosyncratic event of a widely held loan issuer in a non-commodity sector can contribute to small declines in performance trends.

Commodity-related stress will continue to play out in 2016. In response, many CLO managers have already trimmed down their positions in these sectors. Despite some slight par erosion in the process, future losses should be limited. The combined weight of Energy, Oil & Gas and Metals & Mining in the aggregate portfolio notional of Fitch-rated CLOs stood at approximately 5% at the end of last year. Many CLO managers are increasing portfolio weights in Computers and Electronics, Telecommunications, Healthcare, and Retail. Business Services (which also includes some technology issuers) remains the dominant industry concentration.

Fitch's list of Loans of Concern held in CLOs includes issuers across various sectors. Notional of Fitch's Loans of Concern was $9.6 billion at the end of last year, representing approximately 8% of the $115 billion of the aggregate portfolio notional of Fitch-rated CLOs in the Index. The Energy, Oil & Gas and Metals & Mining sectors contributed approximately 27% of the notional amount of Loans of Concern.

U.S. CLO index report also highlights managers' trading activity for recently defaulted assets and describes main drivers behind quarterly changes in portfolio pars and overcollateralization cushions for CLOs that ranked in the top and bottom of Fitch-rated CLOs based on these metrics.

Fitch's U.S. CLO Index is enhanced by its Excel-based Tracker Data File, which allows investors to drill down into the data presented in the Index Report. Performance metrics are normalized across transactions, allowing like-for-like comparisons across deals and managers. The Tracker includes sector-level information such as rating transitions, most referenced issuers and issuer overlap matrices; deal dashboards that present key performance statistics and 12-month trends across transactions; and individual transaction pages that present detailed deal characteristics, historical performance data and Fitch PCM model results.

Fitch's U.S. CLO Index is part of Fitch's series of structured finance index reports. The index reports are updated quarterly and are available at 'www.fitchratings.com' or by clicking on the above link.

Additional information is available at www.fitchratings.com

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