SFA Research Corner: Loan Downgrades: The Canary in the CLO Coal Mine?

Thirty-four corporate obligors whose leveraged loans are held by U.S. Corporate Loan Obligations (CLOs) were downgraded in August. This is the highest monthly number of CLO-held loan downgrades since July 2020, according to S&P’s SF Credit Brief. As businesses continue to navigate strong macroeconomic headwinds, we expect to see credit pain in the leveraged loan and some CLO transactions. However, modern CLO bond structures are robust—credit support levels for CLOs issued after 2010 increased by an average of 38% across all tranches—and the current level of defaults is low. Absent a severe and prolonged downturn, we expect CLOs, particularly highly rated, well-protected senior classes, to be in a strong position to handle some degree of credit deterioration.

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