Middle-market U.S. CLOs in the first quarter had a significantly reduced concentration of near-default loans being held in portfolios compared to year-end 2020, according to a new report from Fitch Ratings.
The structured-credit report that examined portfolios of 55 mid-market collateralized loan obligations noted that 36% of mid-market collateralized loan obligations were failing at least one concentration limit test related to CCC-rated loans. That compares to 63% at the end of the fourth quarter.
Despite the steep decline, Fitch noted, “CCC test failures are still elevated compared to 1Q20 when only 5% of MM CLOs were failing.”
Fifty of the CLOs are in their reinvestment period, allowing manager to buy and sell assets to improve the par standing of a deal.
Default exposure is also down for the quarter at 1.1% of par, compared to 1.4% last December. In addition, exposure to permitted deferrable obligations stabilized at 4.8%, “the first time deferrable exposure has not increased quarter-over-quarter since 1Q20.”
Fitch’s report also stated that average overcollateralization ratios have normalized to pre-pandemic levels, with junior OC test cushions up 60 basis points to 4.4%.
In addition, par erosion (measuring the net loss to the par notional based on trading and default activity) was held in check on existing portfolios: mid-market CLOs with losses averaged a decline of 33 basis points compared to the 43 basis-point loss in the fourth quarter.
