CLO quality shift has big implications for loan market, says report

The average credit quality of CLO portfolios has improved dramatically relative to the overall universe of leveraged loans, according to a new report by Creditsights. The research firm calculates that the Moody’s weighted average ratings factor (warf) of the Standard & Poor’s loan index has increased from 2938 at the start of 2009 to 3213 today.

This is because there has been a massive reduction in the amount of better rated loans outstanding. From the beginning of 2009 the notional amount of high single B to high double B loans outstanding has dropped from $404 billion to $287 billion.

But during the same period, the median warf of CLOs has barely moved at all. The factor has risen by just 1.7% from 2637 to 2682, notes the report, based on data from Creditflux’s CLO Master.

The reason is that CLOs have become holders of a higher proportion of the remaining better quality loans. CLO managers are more likely to sell weaker loans rather than better quality assets in order to preserve the par value of their deals.

Creditsights analyst Chris Taggert notes that this development could skew the dynamics of the holder base of higher rated loans. Across the market, CLO holdings account for around half of all loans in the index, says the report.