Downgrade of Altice France, #2 CLO collateral credit, to CCC could push CLOs closer to the edge
Altice isn't just any CLO credit. Not mentioned in this article is the fact that they are the 2nd (Altice Europe) and 4th (Altice USA) largest source of CLO collateral (source: S&P). Further, 98% of European CLOs own Altice.
As noted below, the downgrade could cause a large increase in the number of deals in breach of CCC CLO limits. When a CLO CCC limit is breached the CLO manager has 2 options - stay in breach or sell CCC collateral. Both options have negative implications for the market. BofA research noted that this single downgrade could cause 2x increase in % of deals with CCC breach - from 7 to 13%.
Further, I reviewed the top 10 CLO exposures and 8 out of the 10 have B level and below ratings and below (only 2 are BB). As of now, only one other top 10 CLO credit is in CCC territory (Lumen Technologies).
Should more of these mega issuers fall to CCC level, CLO investors could find a cascading impact across their CLO investments. Owning many CLO line items may offer less diversity than expected. Exposure to mega issuers could cause investors to be exposed to mass CCC breaches and/or selloffs of collateral.
Key takeaways:
“With Altice’s loans declining in value, CLO managers are going to need to sell other CCC debt that’s priced higher,”?Pratik Gupta, a strategist at Bank of America Corp, said ahead of the downgrade. About 13% of US CLOs may have breached thresholds as a result of the cut, assuming managers don’t react, he said.
"The spike in demand came even as credit metrics among junk borrowers were worsening, with Apollo Global Management Inc. pointing to companies having less income to service their debt. A rising percentage of B or CCC-rated issuers have?negative cash flows, Oaktree Capital Management’s Chief Investment Officer?Bruce Karsh?wrote in a note last week, citing a BofA study."
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#leveragedfinance
#securitization
#ratingagencies
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