Mid-market CLOs offer value despite rising defaults, says Wells Fargo

Middle market loan defaults have continued to rise for much of this year, despite the sharp drop-off in defaults by large loan borrowers, notes Wells Fargo Securities in a report published on Friday. Analyst Dave Preston says that the continued rise could be a cause for concern for mid-market CLOs, investors are compensated for the higher default risk in these deals by higher coupons and better structural protections.

Furthermore, mid-market loans may simply be lagging broadly syndicated defaults: historically, the two default rates have trended in the same direction, notes the report, adding that mid-market deals continue to offer good value compared to large company CLOs.

Late last year the default rate for both large cap and mid-maket loans stood at around 10%. However, since then, broadly syndicated loan default volumes have fallen to below 5%, while that of mid-market loans has risen to over 12%, according to the report.