–Reuters LPC is a global provider of loan market news, data and analytics to the credit markets worldwide. For real-time news and analytics from LPC’s LoanConnector, sign up here.–
A wave of downgrades tied to loan buybacks is igniting debate in the leveraged loan and CLO markets, highlighting the growing tension between CLO managers and rating agencies.
CLO managers are already facing mark-to-market losses resulting from the growing number of loans rated below triple-C in their portfolios. The proportion of CLO portfolios with 15-20% of assets rated CCC+ or below went from about 13% last month to about 37% this month, according to a May 8 research report from Morgan Stanley, which based its calculations on a sample of 527 transactions (Fig. 1).
CLO managers are now dealing with an additional problem arising from rating actions that place issuers that buy back their loans below par in technical default. These technical defaults, managers say, artificially inflate the number of distressed loans in their portfolio, increasing the likelihood that many CLOs will go static.
–Reuters LPC is a global provider of loan market news, data and analytics to the credit markets worldwide. For real-time news and analytics from LPC’s LoanConnector, sign up here.
With the backdrop of a deteriorating economy and continued tight lending conditions, middle market borrowers felt the full effects of the paralysis. Lending capacity deteriorated even further as some lenders were busy dealing with their own liquidity problems or reevaluating their portfolios, while others were lending selectively.