This report does not constitute a rating action
Middle-Market CLO And Private
Credit Quarterly:
Harbor In The Tempest?
Q1 2023
Stephen Anderberg
Daniel Hu
Ramki Muthukrishnan
Evangelos Savaides
Jan. 27, 2023
Middle-Market Lending Key Takeaways
2
Takeaways
• 2022 saw more credit estimate upgrades than downgrades. However, this trend reversed in the fourth quarter. The slowdown in economic growth, coupled
with inflationary pressures and rising interest rates--and the consequent pressure on margins--weighed heavily on companies with high leverage and low
interest coverage ratios.
• Credit estimate upgrades continued to outpace downgrades by a ratio of 1.35 to 1 in 2022 compared to 1.31 to 1 for all of 2021. Improved earnings and better
balance sheets have seen many middle-market companies become candidates for upgrade.
• Among rated loan issuers, we expect the trailing-12-month Morningstar LSTA Leveraged Loan Index default rate to more than double to 2.5% by September
2023 under our base case, which is in line with the long-term historical average rate of 2.5%. Under our pessimistic case, we think defaults could increase to
4.5% over the same period.
• Selective defaults have seen a slight uptick as companies restructured terms of payment given macro-economic headwinds. We expect selective defaults to
continue to rise as more companies will look to restructure outside of the bankruptcy process. From 2020 through third-quarter 2021, conventional defaults
among credit estimated obligors were significantly lower than conventional defaults among rated broadly syndicated loan (BSL) loan issuers, partly due to
many amendments and other actions taken on middle-market loans that averted payment defaults.
Key Risks
• S&P Global Ratings forecasts a mild recession for the U.S. in 2023. We have lowered our GDP forecasts to 1.6% for 2022 and -0.1% for 2023.
• Cost inflation, supply issues, and labor constraints leading to margin compression could result in a pickup in credit estimate downgrades.
Middle-Market CLO Key Takeaways
3
Takeaways
• One middle-market CLO transaction saw two obligor defaults in fourth-quarter 2022, dropping the cushion on its junior-most overcollateralization (O/C) ratio
test to 2.06% from 4.73%. This was enough to (very slightly) reduce the average junior O/C cushion in our index of middle-market CLO performance metrics,
to 7.08% from 7.13% at the start of December 2022. Given the size of the average cushion, though, most middle-market CLOs are a long way off from
triggering an O/C test (see slide 11).
• The typical middle-market U.S. collateralized loan obligation (CLO) has much lower obligor diversity within its portfolio than a typical BSL CLO transaction.
But given that many middle-market CLO managers originate some of the assets in their CLO portfolios, there is much lower asset overlap and greater asset
diversity
between
CLOs from different middle-market CLO managers. See slide 16 for a full matrix of asset overlap between different middle-market CLO
managers.
• We provide other metrics at the CLO manager level on slide 17 and the largest obligors held by two or more middle-market CLO managers on slide 18.
• The level of asset purchases/new assets being added to middle-market CLO portfolios dropped during the year, to 5.33% of target par in fourth-quarter
2022 from 11.70% of target par in first-quarter 2022 (see slide 15). We attribute this to lower asset amortization and fewer loan refinancings in a less
accommodating market.
• Middle-market CLO par build was relatively strong in 2022, with the average CLO in our index (see slide 11) ending the year at 101.23% of target par, up from
100.76% of target par in January 2022. This is at least partly due to new loans being added to the portfolios at less than par (often 97.5% or 98%). However,
the rate of par growth slowed during the year, especially in Q4 2022, as the rate of new assets being added to CLO portfolios dropped.
• Middle-market CLOs saw few downgrades during the pandemic, with only seven ratings lowered during 2020, which is about 1.3% of the outstanding middle-
market CLO ratings, versus 13.0% of BSL CLO ratings lowered during 2020. On slide 12, we discuss some of the reasons why.
4
Industry Median of debt/EBITDA (x)
Internet software and services
8.46
Software
7.92
Road and rail
7.85
Real estate management and development
7.54
Insurance
7.38
Food products
7.33
Aerospace and defense
7.26
Wireless telecommunication services
7.15
Distributors
6.96
Life sciences tools and services
6.90
Top 10 Industries With The Highest S&P Global Ratings
Calculated Leverage Ratios In 2022
Top 10 Industries With The Lowest S&P Global Ratings
Calculated Interest Coverage Ratios In 2022
Credit Estimates | Median Leverage And Interest Coverage By Sector
Source: S&P Global Ratings. Source: S&P Global Ratings.
Industry Median interest coverage (x)
Software
1.42
Real estate management and development
1.53
Wireless telecommunication services
1.59
Aerospace and defense
1.66
Textiles, apparel, and luxury goods
1.80
Household products
1.86
Internet software and services
1.89
Road and rail
1.89
Capital markets
1.89
Health care technology
1.93
5
Number Of Outstanding S&P Global Ratings Credit Estimates (2012 – Q4 2022)(i)
Middle-Market CLOs | Growth In Outstanding Credit Estimates
(i)Covers all outstanding S&P Global Ratings U.S. credit estimates, including estimates for obligors not currently held within a CLO transaction.
CLO--Collateralized loan obligation. Source: S&P Global Ratings.
0
500
1,000
1,500
2,000
2,500
Jan. 2007 Jan. 2008 Jan. 2009 Jan. 2010 Jan. 2011 Jan. 2012 Jan. 2013 Jan. 2014 Jan. 2015 Jan. 2016 Jan. 2017 Jan. 2018 Jan. 2019 Jan. 2020 Jan. 2021 Jan. 2022
Outstanding credit estimates (no.)
6
Middle-Market CLOs | Credit Estimate Score Distribution
• Before the pandemic, about 75% of our
outstanding credit estimates were ‘b-’.
• This dropped to about 69% after the
pandemic induced downgrades of ‘b-’ credit
estimates into the ‘ccc’ category.
• By 2022, over 75% of outstanding credit
estimates were back at ‘b-’ as performance
of companies rebounded, and many obligors
saw their credit estimates raised back to ‘b-’
from the ‘ccc’ range.
Overall Credit Estimate Distribution By Issuer Count(i)
(i)Covers all outstanding S&P Global Ratings U.S. credit estimates, including estimates for obligors not currently held within a CLO transaction.
CLO--Collateralized loan obligation. Source: S&P Global Ratings.
2
7
69
16
6
3
9
76
9
3
0
10
20
30
40
50
60
70
80
b+ and above b b- ccc+ ccc and below
(% of issuers)
Issuer credit estimate
Outstanding as of Q4 2020 Outstanding as of Q4 2022
7
Middle-Market CLOs | Credit Estimates Raised And Lowered
• Downgrades peaked in the second quarter of
2020 due to the pandemic as we lowered
credit estimate scores to ‘ccc’/’sd’/’d’ on
over 85 entities.
• From second-quarter 2021 forward,
upgrades have continued to outpace
downgrades, until the fourth quarter of 2022.
• We can expect to see downgrades to rise
from margin compression due to increased
borrowing costs, inflation, and labor
constraints.
Credit Estimates Raised And Lowered By Quarter (2020 – Q4 2022)
Source: S&P Global Ratings.
20
5
16
18
25
32
40
45
55
35
39
25
41
110
40 40
44
22
28
14
22
26
34
32
0
20
40
60
80
100
120
Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022
Credit estimate (no.)
Raised Lowered
8
Credit Estimates
Raised And Lowered By Sector
As Of Q4 2022
Drivers of raised credit estimates:
• Growth in EBITDA
• Decrease in leverage
• Rebound from COVID-19
• Improved interest coverage
• Better operational performance
Drivers of lowered credit estimates:
• High leverage
• Weak liquidity
• Inflationary pressure
• Supply chain disruptions
• Acquisitive growth strategy
Source: S&P Global Ratings.
Top five sectors upgraded (overall percentage of upgrades) (%)
Sector exposure of total
credit estimates (%)
1
Healthcare Providers and Services
11.0 12.4
2
Hotels, Restaurants and Leisure
9.7 3.0
3
Software
9.7 13.9
4
Commercial Services and Supplies
7.8 5.8
5
Diversified Consumer Services
5.2 3.9
Top five sectors downgraded (overall percentage of
downgrades) (%)
Sector exposure of total
credit estimates (%)
1
Software
16.7 13.9
2
Healthcare providers and services
9.6 12.4
3
Food products
7.0 1.9
4
Commercial services and supplies
6.1 5.8
5
Professional services
5.3 5.1
154 Upgrades In 2022
114 Downgrades In 2022
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22
b+ and above
b
b-
ccc+
ccc
ccc-
cc/sd/d
9
Outstanding Credit Estimate Distribution By Issuer Count, (2007–Q4 2022)(i)
Credit Estimates | Credit Quality Over The Years
(i)Covers all outstanding S&P Global Ratings U.S. credit estimates, including estimates for obligors not currently held within a CLO transaction. CLO--Collateralized loan obligation. Source: S&P Global Ratings.
• Many of the companies we
assign credit estimates to are
financial sponsor-owned and
generally highly levered.
• The median EBITDA of these
companies was $24 million,
and the median adjusted debt
was about $175 million.
• Due to their weaker business
and financial risk profiles, a
large majority of these
companies tend to have credit
estimate scores at the lower
end of the credit spectrum,
especially ‘b-’.
March 2020:
Arrival of COVID-19
pandemic
10
Middle-Market Loan Performance | Default Rate Comparison
• After dipping to 0.26% in April, the Morningstar
LSTA Leveraged Loan Index default rate (yellow line)
among rated issuers increased to 0.69% in
December.
• The dashed blue line, which includes both selective
and conventional defaults among credit estimated
issuers, declined sharply to below 2.0% in August
2022 after peaking at nearly 8% in 2020.
• If we exclude selective defaults and focus only on
conventional defaults among credit estimated
issuers (solid blue line), the default rate was much
lower, increasing to about 2.5% in July 2020 before
declining below 0.25% by November 2022.
• From 2020 through third-quarter 2021, conventional
defaults among credit estimated obligors were
significantly lower than conventional defaults
among rated BSL loan issuers, partly due to many
amendments and other actions on middle-market
loans that averted payment defaults. This had the
effect of raising the level of selective defaults
among credit estimated issuers while decreasing
the level of payment defaults.
One-Year Lagging Default Rate: Credit Estimates Vs. LSTA Index
Source: S&P Global Ratings.
0
1
2
3
4
5
6
7
8
9
Jul. 2017 Jul. 2018 Jul. 2019 Jul. 2020 Jul. 2021 Jul. 2022
(%)
Credit estimate
default rate -
including
selective defaults
Morningstar/LSTA
Leverated Loan
Index - LTM # of
defaults / total
defaults
Credit estimate
default rate -
excluding
selective defaults
• The metrics below are averaged across an index of about 60 reinvesting S&P Global Ratings-rated U.S. middle-market (MM) CLOs issued across 21 different managers.
• The various credit metrics have held steady year to date, with the S&P Global Ratings' weighted average rating factor (SPWARF) remaining stable in 2022.
• Par balance has continued to gradually increase, along with junior overcollateralization (O/C) test cushions.
• Defaults reported within trustee reports led to notable declines in O/C ratios for one transaction in December, which affected the overall average O/C test cushion.
Middle-Market CLOs | Par Build Slows But Credit Metrics Hold Steady
Credit Metrics For Collateral In Reinvesting S&P Global Ratings
-Rated Middle-Market CLOs
Date ‘B-’ exposure (%)(i) ‘CCC’ exposure (%)(i) No rating/CE (%)(i) Non-performing (%)(i) SPWARF
Jr. O/C
test cushion (%)
Current par
(% target par)
Jan. 1, 2022 71.75 10.15
8.86
0.30 3858
6.63
100.76
Feb. 1, 2022 70.54 9.54
10.05
0.23 3870 6.71 100.81
Mar. 1, 2022 71.75 9.06
8.97
0.27 3842
6.90
100.86
Apr. 1, 2022 70.66 9.10
9.80
0.26 3856
6.93
100.90
May 1, 2022 73.04 8.92
7.45
0.35 3812
6.83
100.97
Jun. 1, 2022 73.09 9.22
7.12
0.31 3805
6.96
101.00
Jul. 1, 2022 74.19 9.12 7.16 0.37 3819 7.01 101.05
Aug. 1, 2022 73.61 8.80
8.27
0.32 3840 7.03 101.08
Sep. 1, 2022 73.02 9.06
8.10
0.26 3829
7.02
101.12
Oct. 1, 2022 73.59 9.00 7.74 0.24 3824
7.06
101.16
Nov. 1, 2022 73.72 9.54
7.30
0.22 3827 7.14 101.18
Dec. 1, 2022 73.51 9.82 7.13 0.22 3822 7.13 101.18
Jan. 1, 2023 73.71 10.28
6.40
0.21 3813 7.08 101.23
11
(i)By par amount as proportion of total CLO collateral. CLO--Collateral loan obligation. CE--Credit enhancement. O/C--Overcollateralization. SPWARF-S&P Global Ratings' weighted average rating factor.-Source: S&P Global Ratings.
Middle-Market CLOs | Few Downgrades In 2020 (And None Since)
Middle-market CLO transactions performed well during the pandemic, with only seven ratings lowered during 2020--about 1.3% of the outstanding ratings at the time, versus
13.0% of BSL CLO ratings lowered during the year. Why?
1) CLO structural reasons: Middle-market CLOs tend to have more par subordination and rating cushion at a given tranche level than a typical BSL CLO, with this being
positively correlated with the proportion of credit estimates in a CLO collateral pool. Middle-market CLOs also sometimes don’t issue lower rated (‘BBB’ and ‘BB’)
tranches, which would be more likely to see downgrades.
2) Fewer loan payment defaults: In 2020, parties to middle-market loan agreements were able to amend loan terms in ways that avoided payment defaults and
bankruptcy. This took different forms: rolling scheduled amort into the final bullet, allowing a company to payment-in-kind (PIK) upcoming interest payments, pushing
out loan maturities, etc. S&P Global Ratings treated some of these as selective defaults, but they reduced the level of conventional (payment) defaults on these loans
(see slide 10).
3) Some sponsors injected cash into their companies: This was done because, in some cases, sponsors saw value in infusing equity rather than losing control of the
company in a payment default/bankruptcy scenario. In a more protracted downturn, however, the economic incentives to do this might be less appealing.
4) CLO manager asset swaps: Under their CLO indenture provisions, middle-market CLO managers can swap out distressed assets from the portfolio and replace them
with loans from better performing companies. Because middle-market CLO managers often (although not always) hold the CLO equity in their transactions, and because
they often manage assets across different types of accounts, in some cases, they may be incentivized to move distressed assets outside of their CLO(s) and replace
them. It’s also often easier for a manager to work out a distressed loan outside the CLO.
12
BSL--Broadly syndicated loan. CLO--Collateralized loan obligation. Source: S&P Global Ratings.
U.S. BSL CLO And Middle-Market CLO Rating Changes (2020-2022)
CLO type
Total ratings
(mid-2020) Rating action Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Total
BSL CLOs 3,786
Downgrades 19 464 10 4 7 2 4 5 1 3 3 522
Upgrades 5 5 17 23 200 4 70 2 3 329
MM CLOs 553
Downgrades 7 7
Upgrades 2 13 2 5 2 2 26
13
BSL CLO Vs. MM CLO Loan Maturity Wall
BSL CLO Vs. MM CLO Loan Spreads
Comparing BSL CLOs
and MM CLOs:
• The maturity wall for loans
within BSL CLOs is pushed
out considerably further
than for the loans within
MM CLO transactions.
• Spreads above LIBOR/SOFR
are higher for loans in MM
CLOs by an average of
about 1.9% compared to
loans in BSL CLO
transactions.
• Credit spreads widened for
both middle-market and
BSL new issue loans
starting in late first-quarter
2022 for BSL loans and
third-quarter 2022 for MM
loans.
Middle-Market CLOs | Maturity Wall And Loans Spreads Vs. BSL CLO Assets
MM--Middle market. BSL--Broadly syndicated loan. CLO--Collateralized loan obligation. Source: S&P Global Ratings.
0
5
10
15
20
25
30
35
2023 2024 2025 2026 2027 2028 2029 2030 and later
(%)
BSL CLO exposures MM CLO exposures
0
5
10
15
20
25
30
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 >8
(%)
BSL CLO exposures MM CLO exposures
MM--Middle market. BSL--Broadly syndicated loan. CLO--Collateralized loan obligation. Source: S&P Global Ratings.
14
Top 30 Industries (GICS categories) In MM CLO and BSL CLO Collateral Pools
Middle-Market CLOs | Software And Healthcare Are Largest Industries
MM--Middle market. BSL--Broadly syndicated loan. CLO--Collateralized loan obligation. Source: S&P Global Ratings.
0
2
4
6
8
10
12
14
16
Software
Healthcare Providers and Services
Commercial Services and Supplies
Insurance
Professional Services
IT Services
Hotels, Restaurants and Leisure
Health Care Technology
Diversified Consumer Services
Capital Markets
Trading Companies and Distributors
Chemicals
Food Products
Construction and Engineering
Healthcare Equipment and Supplies
Media
Distributors
Machinery
Aerospace and Defense
Specialty Retail
Electronic Equipment, Instruments and
Components
Food and Staples Retailing
Containers and Packaging
Auto Components
Textiles, Apparel and Luxury Goods
Household Durables
Air Freight and Logistics
Pharmaceuticals
Life Sciences Tools and Services
Personal Products
(%)
BSL CLO assets MM CLO assets
15
• Volume of purchases has declined
throughout 2022, as prepayments have
slowed.
• Average price of purchases and sales (as
reported within trustee reports) were
similar, resulting in steady portfolio par
balance across MM CLOs in 2022.
• Sales of asset from ‘ccc’ obligors, as a
proportion of fourth-quarter 2022 sales, is
notably larger than that of purchases; we
think this is evidence of manger de-risking.
• Sale prices of assets from ‘ccc’ obligors were
also slightly lower than average.
Middle-Market CLOs | Purchases And Sales In 2022
MM--Middle market. CLO--Collateralized loan obligation. Source: S&P Global Ratings.
S&P Global Ratings MM CLO Asset Trades By Issuer Rating
Or Credit Estimate In Fourth-Quarter 2022
Rating category
Purchase
(% of trades) Avg purchase price
Sales
(% of trades) Avg sale price
bb category 0.01 97.50 1.21 96.87
b+ 0.03 97.50 0.84 97.78
b 9.00 96.87 10.50 98.19
b- 63.61 97.87 63.72 98.49
ccc category 9.51 98.56 21.13 95.06
No CE at time of purchase 17.84 98.23 2.60 98.65
Quarter
Average
purchase price
Purchases as %
of target par
Average
sale price
Sales as %
of target par
Q1 2022
98.68 11.70 98.81
3.20
Q2 2022
98.81 8.02 99.13
2.26
Q3 2022
98.20 6.63 98.09
1.77
Q4 2022
97.91 5.33 97.71
2.92
Source: S&P Global Ratings.
Middle-Market CLOs | The Matrix: Q4 2022 Asset Overlap By Manager
16
Alliance Bernstein
Angelo Gordon/
Twin Brook
Antares
Apollo
Ares
Audax
Bain
Barings
BMO
Brightwood
Carlyle
Churchill
Deerpath
First Eagle/
NewStar
Fortress
Golub
GSO/
Blackstone
Guggenheim
KCAP/
Garrison
KKR
Maranon
MCF/Madison
Midcap
Monroe
NXT Capital
Owl Rock
Pennantpark
Silver Rock
Tennenbaum/
Blackrock
Alliance Bernstein 0.0% 2.6% 0.0% 5.6% 0.9% 1.9% 1.4% 1.6% 0.9% 3.8% 2.1% 1.2% 0.0% 2.3% 5.9% 0.3% 1.3% 4.9% 2.4% 1.6% 3.5% 5.1% 1.3% 2.8% 3.1% 1.6% 2.3% 4.2%
Angelo Gordon/Twin Brook 0.0% 0.2% 0.0% 0.3% 0.0% 0.0% 0.1% 2.2% 0.0% 0.0% 0.6% 0.0% 1.2% 0.0% 0.0% 0.7% 0.0% 1.8% 0.0% 1.3% 0.3% 3.1% 0.0% 0.3% 0.0% 0.2% 0.0% 0.0%
Antares 2.6% 0.2% 0.0% 7.9% 4.9% 5.9% 10.1% 7.7% 1.0% 2.8% 13.0% 1.4% 7.0% 1.6% 7.4% 0.3% 2.5% 4.2% 3.3% 5.1% 7.7% 4.5% 3.0% 9.4% 8.2% 5.0% 0.8% 6.9%
Apollo 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0%
0.0% 2.3% 0.0% 0.0% 2.4% 0.0% 0.7% 0.0% 0.0% 0.9% 8.7% 0.5% 0.0% 0.0% 2.6% 0.0% 0.0%
Ares 5.6% 0.3% 7.9% 0.0% 11.9% 2.0% 5.1% 2.2% 0.6% 1.0% 6.0% 0.3% 3.1% 3.1% 6.9% 2.1% 6.5% 8.6% 5.4% 2.2% 7.6% 4.1% 9.4% 1.6% 5.0% 1.3% 0.0% 8.2%
Audax 0.9% 0.0% 4.9% 0.0% 11.9% 1.5% 1.9% 0.6% 0.5% 2.3% 8.5% 3.9% 4.2% 2.6% 0.9% 0.8% 4.2% 7.6% 0.2% 2.8% 3.4% 0.5% 14.3% 0.4% 3.7% 3.6% 0.0% 3.2%
Bain 1.9% 0.0% 5.9% 0.0% 2.0% 1.5% 2.2% 0.0% 0.0% 0.0% 2.7% 0.0% 4.0% 1.6% 3.1% 0.0% 0.0% 0.9% 0.0% 0.0% 0.5% 0.3% 0.6% 2.9% 3.4% 1.6% 0.0% 3.6%
Barings 1.4% 0.1% 10.1% 0.1% 5.1% 1.9% 2.2% 5.7% 1.5% 2.9% 10.8% 0.4% 5.7% 1.1% 0.7% 1.8% 1.9% 2.3% 1.8% 3.0% 2.5% 5.5% 4.7% 6.8% 1.5% 2.9% 1.5% 2.4%
BMO
1.6% 2.2% 7.7% 0.0% 2.2% 0.6% 0.0% 5.7% 1.1% 0.0% 1.8% 4.8% 1.8% 0.0% 0.5% 0.4% 1.3% 6.3% 0.0% 5.4% 3.3% 4.0% 0.8% 5.8% 0.9% 0.8% 1.2% 0.0%
Brightwood 0.9% 0.0% 1.0% 0.0% 0.6% 0.5% 0.0% 1.5% 1.1% 0.5% 1.1% 0.0% 1.1% 1.4% 1.0% 0.0% 0.0% 4.2% 0.8% 0.0% 0.5% 1.4% 1.0% 0.0% 0.4% 1.8% 3.0% 3.1%
Carlyle 3.8% 0.0% 2.8% 0.0% 1.0% 2.3% 0.0% 2.9% 0.0% 0.5% 1.6% 0.0% 3.4% 0.6% 0.6% 1.5% 2.6% 1.5% 5.5% 0.0% 2.2% 3.0% 1.7% 0.0% 4.7% 2.3% 4.6% 1.8%
Churchill 2.1% 0.6% 13.0% 0.0% 6.0% 8.5% 2.7% 10.8% 1.8% 1.1% 1.6% 1.4% 6.0% 0.5% 4.5% 1.9% 2.3% 6.1% 0.6% 5.3% 6.8% 4.7% 8.5% 3.1% 3.5% 2.4% 0.0% 6.1%
Deerpath 1.2% 0.0% 1.4% 0.0% 0.3% 3.9% 0.0% 0.4% 4.8% 0.0% 0.0% 1.4% 1.0% 0.4% 0.1% 0.5% 0.0% 2.5%
0.0% 0.0% 1.0% 0.0% 1.5% 1.2% 0.8% 1.8% 0.0% 0.0%
First Eagle/NewStar 0.0% 1.2% 7.0% 2.3% 3.1% 4.2% 4.0% 5.7% 1.8% 1.1% 3.4% 6.0% 1.0% 3.5% 1.3% 4.5% 4.7% 6.3% 0.5% 3.0% 6.4% 5.9% 5.1% 4.4% 0.7% 7.0% 0.0% 5.3%
Fortress 2.3% 0.0% 1.6% 0.0% 3.1% 2.6% 1.6% 1.1% 0.0% 1.4% 0.6% 0.5% 0.4% 3.5% 1.2% 0.1% 2.1% 3.8% 0.4% 0.0% 0.0% 1.7% 1.0% 1.4% 3.7% 1.1% 6.9% 3.5%
Golub 5.9% 0.0% 7.4% 0.0% 6.9% 0.9% 3.1% 0.7% 0.5% 1.0% 0.6% 4.5% 0.1% 1.3% 1.2% 0.1% 1.7% 3.6% 5.8% 0.7% 4.2% 1.2% 0.3% 2.3% 5.8% 0.6% 0.1% 6.5%
GSO/Blackstone 0.3% 0.7% 0.3% 2.4% 2.1% 0.8% 0.0% 1.8% 0.4% 0.0% 1.5% 1.9% 0.5% 4.5% 0.1% 0.1% 0.3% 2.2% 0.0% 1.8% 0.6% 2.0% 0.6% 0.5% 0.0% 1.6% 0.0% 0.0%
Guggenheim 1.3% 0.0% 2.5% 0.0% 6.5% 4.2% 0.0%
1.9% 1.3% 0.0% 2.6% 2.3% 0.0% 4.7% 2.1% 1.7% 0.3% 4.0% 2.5% 2.5% 0.0% 1.7% 6.2% 0.0% 4.9% 1.9% 1.9% 7.3%
KCAP/Garrison 4.9% 1.8% 4.2% 0.7% 8.6% 7.6% 0.9% 2.3% 6.3% 4.2% 1.5% 6.1% 2.5% 6.3% 3.8% 3.6% 2.2% 4.0% 0.0% 1.6% 0.8% 5.5% 5.7% 1.6% 0.7% 6.2% 1.0% 4.2%
KKR 2.4% 0.0% 3.3% 0.0% 5.4% 0.2% 0.0% 1.8% 0.0% 0.8% 5.5% 0.6% 0.0% 0.5% 0.4% 5.8% 0.0% 2.5% 0.0% 0.6% 1.1% 2.8% 2.2% 1.4% 3.6% 0.0% 0.0% 6.4%
Maranon 1.6% 1.3% 5.1% 0.0% 2.2% 2.8% 0.0% 3.0% 5.4% 0.0% 0.0% 5.3% 0.0% 3.0% 0.0% 0.7% 1.8% 2.5% 1.6% 0.6% 4.9% 3.2% 0.4% 4.7% 0.8% 1.8% 1.3% 5.2%
MCF/Madison 3.5% 0.3% 7.7% 0.9% 7.6% 3.4% 0.5% 2.5% 3.3% 0.5% 2.2% 6.8% 1.0% 6.4% 0.0% 4.2% 0.6% 0.0% 0.8% 1.1% 4.9% 7.4% 1.5% 7.4% 2.1%
3.1% 0.6% 3.0%
Midcap 5.1% 3.1% 4.5% 8.7% 4.1% 0.5% 0.3% 5.5% 4.0% 1.4% 3.0% 4.7% 0.0% 5.9% 1.7% 1.2% 2.0% 1.7% 5.5% 2.8% 3.2% 7.4% 3.3% 3.4% 0.1% 2.8% 0.0% 3.4%
Monroe 1.3% 0.0% 3.0% 0.5% 9.4% 14.3% 0.6% 4.7% 0.8% 1.0% 1.7% 8.5% 1.5% 5.1% 1.0% 0.3% 0.6% 6.2% 5.7% 2.2% 0.4% 1.5% 3.3% 1.1% 1.7% 2.2% 1.1% 7.3%
NXT Capital 2.8% 0.3% 9.4% 0.0% 1.6% 0.4% 2.9% 6.8% 5.8% 0.0% 0.0% 3.1% 1.2% 4.4% 1.4% 2.3% 0.5% 0.0% 1.6% 1.4% 4.7% 7.4% 3.4% 1.1% 3.3% 5.0% 0.0% 2.5%
Owl Rock 3.1% 0.0% 8.2% 0.0% 5.0% 3.7% 3.4% 1.5% 0.9% 0.4% 4.7% 3.5% 0.8% 0.7% 3.7% 5.8% 0.0% 4.9% 0.7% 3.6% 0.8% 2.1% 0.1% 1.7% 3.3% 3.7% 0.0% 6.0%
Pennantpark 1.6% 0.2% 5.0% 2.6% 1.3% 3.6% 1.6% 2.9% 0.8% 1.8% 2.3% 2.4% 1.8% 7.0%
1.1% 0.6% 1.6% 1.9% 6.2% 0.0% 1.8% 3.1% 2.8% 2.2% 5.0% 3.7% 1.9% 4.9%
Silver Rock 2.3% 0.0% 0.8% 0.0% 0.0% 0.0% 0.0% 1.5% 1.2% 3.0% 4.6% 0.0% 0.0% 0.0% 6.9% 0.1% 0.0% 1.9% 1.0% 0.0% 1.3% 0.6% 0.0% 1.1% 0.0% 0.0% 1.9% 6.3%
Tennenbaum/Blackrock 4.2% 0.0% 6.9% 0.0% 8.2% 3.2% 3.6% 2.4% 0.0% 3.1% 1.8% 6.1% 0.0% 5.3% 3.5% 6.5% 0.0% 7.3% 4.2% 6.4% 5.2% 3.0% 3.4% 7.3% 2.5% 6.0% 4.9% 6.3%
Source: S&P Global Ratings.
Middle-Market CLOs | Q4 2022 Middle-Market Manager Metrics
17
(i)Based on third-quarter 2022 exposure to companies with ratings/credit estimates raised & lowered in Q4 2022. Includes both rated obligors and credit estimated obligors. (ii)Assets without credit estimate (or other derived S&P Global Ratings’
rating) treated as ‘ccc-’ for purposes of SPWARF calculation. Includes both rated and credit estimated obligors. MM--Middle-market. CLO--Collateralized loan obligation. DG--Downgrade. UG--Upgrade. SPWARF--S&P Global Ratings weighted average
rating factor. WAS--Weighted average spread. WAM--Weighted average maturity. Source: S&P Global Ratings.
Manager
Largest GIC Industry
Largest GICS
industry (%)
No. of GICS
Industries
Largest issuer
exposure (%)
No. of
issuers
DG:UG ratio in
Q4 2022(i)
Credit
estimated
issuers (%)
SPWARF(ii)
WAS (%)
WAM
% of MM CLO
assets unique
to manager
Manager with largest
overlap
Proportion overlap (%)
Alliance Bernstein
Software
31.04
26
1.95
134 5:1 86.62
3897
5.65 3.96 48.01%
Golub
5.90
Angelo Gordon/Twin Brook
Healthcare providers and services
18.53
28
2.13
75 4:0 91.69
3848
5.78 2.62 79.29%
Midcap
3.09
Antares
Healthcare providers and services
11.27
44
0.86
283 8:6 88.28
3734
5.14 3.47 30.71%
Churchill
12.98
Apollo
Professional Services
13.18
15
5.50
25 0:0 85.73
3874
5.49 4.46 18.12%
Midcap
8.73
Ares
Software
15.41
39
2.04
210 5:2 58.02
3660
5.19 3.76 21.68%
Audax
11.92
Audax
Software
17.68
40
1.09
246 3:3 13.23
3543
4.40 4.39 2.80%
Monroe
14.28
Bain
Professional Services
12.78
25
3.29
42 0:0 91.91
3855
6.09 3.89 38.70%
Antares
5.86
Barings
Software
17.09
39
2.46
137 3:2 81.78
3665
5.24 3.86 33.40%
Churchill
10.82
BMO
Healthcare providers and services
16.20
40
1.71
160 1:1 85.74
3917
5.07 3.32 50.43%
Antares
7.68
Brightwood
Commercial services and supplies
21.77
26
5.26
61 0:1 81.96
3572
6.37 3.41 63.23%
KCAP/Garrison
4.20
Carlyle
Commercial services and supplies
9.72
24
5.05
60 0:0 80.15
3965
6.17 3.95 30.21%
KKR
5.48
Churchill
Healthcare providers and services
8.70
42
1.49
186 2:1 76.18
3744
5.11 3.99 22.61%
Antares
12.98
Deerpath
Healthcare providers and services
23.14
40
2.21
145 3:1 82.47
3771
5.59 3.29 69.86%
BMO
4.81
First Eagle/NewStar
Healthcare providers and services
14.43
48
2.34
172 10:6 68.09
3762
5.58 3.64 25.57%
Pennantpark
7.02
Fortress
Hotels, restaurants, and leisure
14.11
41
4.03
134 3:3 67.86
3698
6.59 3.72 53.93%
Silver Rock
6.92
Golub
Software
24.00
45
1.59
258 6:4 89.54
3856
5.60 3.80 53.82%
Antares
7.39
GSO/Blackstone
Hotels, restaurants, and leisure
16.91
21
9.03
33 2:0
49.41
3763
5.24 2.57 5.61%
First Eagle/
NewStar 4.54
Guggenheim
Software
12.51
41
3.32
126 5:3 50.10
3910
5.13 4.16 20.31%
Tennenbaum/Blackrock
7.34
KCAP/Garrison
Software
17.91
43
2.50
131 6:4 49.56
3810
5.57 3.77 15.22%
Ares
8.62
KKR
Healthcare providers and services
12.56
23
3.26
52 1:0 74.55
4063
6.16 4.31 43.50%
Tennenbaum
/Blackrock 6.36
Maranon
Commercial services and supplies
8.53
32
2.29
107 6:1 91.42
3791
5.52 3.39 52.17%
BMO
5.37
MCF/Madison
Healthcare providers and services
10.91
42
1.71
196 3:1 87.37
3800
5.55 3.61 35.85%
Antares
7.67
Midcap
Healthcare providers and services
9.04
46
1.71
207 6:6 90.24
3830
5.66 3.64 39.80%
Apollo
8.73
Monroe
Software
15.71
37
1.25
128 9:0 35.32
3518
4.84 4.56 17.01%
Audax
14.28
NXT Capital
Healthcare providers and services
14.12
31
2.15
104 1:0 91.68
3869
5.23 3.33 35.33%
Antares
9.42
Owl Rock
Software
22.85
37
3.88
141 5:1 81.55
3770
5.81 4.05 19.67%
Antares
8.19
Pennantpark
Media
10.86
35
2.13
109 2:1 82.00
3783
5.81 3.43 45.04%
First Eagle/
NewStar 7.02
Silver Rock
Commercial Services and supplies
10.97
32
3.14
45 3:1 51.66
3873
6.82 3.85 31.47%
Fortress
6.92
Tennenbaum/Blackrock
Software
25.64
43
1.63
167 5:1
75.56
3744
5.68 4.22 26.77%
Ares
8.22
• There are about 1,600 issuers with loans in
our rated middle-market CLO transactions,
about the same number of obligors
contained in our rated BSL CLOs.
• Compared to the obligors in BSL CLOs, there
is far less overlap in middle-market CLOs; for
example, the most widely held obligor in BSL
CLOs is held by nearly every CLO manager,
while the top obligor in middle-market CLOs
is held by just nine managers.
• The list of obligors on this slide is based off
the most recent trustee reports we have
received for middle-market CLOs and
represents the top 30 obligors held by
multiple managers.
• The par amount given in the table is the total
exposure across S&P Global Ratings-rated
middle-market CLOs.
• Several of the most widely names have
changed since the end of third-quarter 2022.
18
Middle-Market CLOs | Top 30 Obligors Held By More Than Two Managers
Source: S&P Global Ratings.
# Company Manager count Total par ($) GICS Industry
1 DRILLING INFO, INC. 9 316,652,699.90 Software
2 ImageFirst Holdings LLC 8 65,995,338.35 Commercial Services and Supplies
3 RSC INSURANCE BROKERAGE, INC 7 435,033,198.97 Insurance
4 Edgewood Partners Holdings, LLC 7 339,407,752.64 Insurance
5 ALERA GROUP HOLDINGS, INC. 7 287,934,890.68 Insurance
6 Jensen Hughes Inc. 7 84,623,213.80 Construction and Engineering
7 INTEGRITY MARKETING ACQUISITION, LLC 6 288,985,614.37 Insurance
8 ALPINE ACQUISITION CORP. II 6 158,156,174.90 Commercial Services and Supplies
9 WEG HOLDINGS, LLC 6 155,289,830.56 Capital Markets
10 CM GROUP LTD. 6 138,500,639.94 IT Services
11 ARCH GLOBAL PRECISION, LLC 6 129,772,565.84 Machinery
12 HIG Holdings, Inc. 6 119,130,301.80 Insurance
13 KNEL Acquisition LLC 6 114,157,433.07 Personal Products
14 OMNI PARENT, LLC 6 112,227,847.56 Transportation Infrastructure
15 Symplr Software Intermediate Holdings Inc. 6 75,796,703.90 Health Care Technology
16 AMS Intermediate Holdings LLC 6 74,396,442.24 Diversified Consumer Services
17 Output Services Group Inc. 6 63,390,511.76 IT Services
18 Ta TT Buyer LLC 6 52,585,837.59 Technology Hardware, Storage and Peripherals
19 PEACH STATE LABS, LLC 6 31,346,516.70 Chemicals
20 DILIGENT CORPORATION 5 307,415,898.68 Software
21 OHIO TRANSMISSION CORPORATION 5 191,395,038.67 Trading Companies and Distributors
22 MRI Intermediate Holdings LLC 5 191,384,425.10 Software
23 AWP HOLDING COMPANY 5 146,246,222.69 Commercial Services and Supplies
24 RHODE HOLDINGS INC. 5 146,143,843.24 Software
25 PC FOY HOLDINGS, LLC 5 154,202,391.69 Insurance
26 TL LIGHTING HOLDINGS, LLC 5 135,157,030.51
Auto Components
27 ECMI HOLDINGS, LLC 5 126,673,423.66 Construction Materials
28 PROCARE SOFTWARE HOLDINGS, LLC 5 119,969,977.59 Software
29 IG Investments Holdings LLC 5 157,007,655.15 IT Services
30 LONG'S DRUGS INCORPORATED 5 117,984,937.29 Food and Staples Retailing
19
• We applied a series of five hypothetical
stress scenarios to a sample of 65 of our
rated middle-market CLO transactions
still within their reinvestment periods,
generating quantitative analysis for each
one using our CLO rating models (CDO
Evaluator and S&P Cash Flow Evaluator).
• The first four scenarios feature
increasing levels of collateral default
stress, while the fifth scenario assumes
that all ‘ccc’ category obligors default
with a 50% recovery and all ‘b-‘ obligors
are lowered to a rating of ‘ccc+’.
• The stress scenarios shows the
fundamentals of the CLO structure
protecting the noteholders, especially
for the senior CLO tranches, and that
middle-market CLOs can withstand
comparable asset defaults with less
rating impact than BSL CLOs.
Rating Stress Scenarios | How Resilient Are Middle-Market CLO Ratings?
WA--Weighted average. Source: S&P Global Ratings.
CLO tranche rating 0 -1 -2 -3 -4 -5 -6 -7 or more WA notches Spec.-grade
‘CCC’
category
Below
'CCC-'
AAA 98.1% 1.9%
0.02
AA 100.0%
0.00
A 95.1% 4.9%
0.05
BBB 95.6% 4.4%
0.04
4.4%
BB 88.9% 2.8% 2.8% 5.6%
0.50
100.0% 5.6%
CLO tranche rating 0 -1 -2 -3 -4 -5 -6 -7 or more WA notches Spec.-grade
‘CCC’
category
Below
'CCC-'
AAA 95.0% 5.0%
0.05
AA 98.0% 2.0%
0.02
A 88.9% 6.2% 4.9%
0.16
BBB 91.2% 7.4% 1.5%
0.12
5.9%
BB 66.7% 16.7% 5.6% 2.8% 8.3%
0.97
100.0% 2.8% 8.3%
20
• Even under the most punitive of our
scenarios, with 30% of the collateral in
the CLOs defaulting with a 50% recovery,
more than 98% of the CLO ‘AAA’ ratings
either remain ‘AAA’ or are downgraded
one notch to ‘AA+’ and none are lowered
by more than two notches (i.e., below
‘AA’).
• As expected, ratings further down the
MM CLO capital stack were affected
more significantly in the hypothetical
stress scenarios.
• For example, under our most stressful
scenario (the above-referenced 30%
default case), the average MM CLO ‘BBB’
tranche rating was lowered by slightly
more than two notches, 1.5% of the CLO
ratings were lowered into the ‘CCC’
range, and 2.9% of the CLO tranches
defaulted.
Rating Stress Scenarios | How Resilient Are Middle-Market CLO Ratings?
WA--Weighted average. Source: S&P Global Ratings.
CLO tranche rating 0 (%) -1 (%) -2 (%) -3 (%) -4 (%) -5 (%) -6 (%)
-7 or more
(%) WA notches
Spec.-grade
(%)
‘CCC’
category (%)
Below
'CCC-’ (%)
AAA 90.6 9.4
0.09
AA 89.1 6.9 4.0
0.15
A 53.1 27.2 16.0 1.2 2.5
0.73
1.2
BBB 36.8 54.4 5.9 2.9
0.78
57.4
BB 16.7 27.8 19.4 8.3 11.1 5.6 11.1
2.42
100.0 11.1 11.1
CLO tranche rating 0 (%) -1 (%) -2 (%) -3 (%) -4 (%) -5 (%) -6 (%)
-7 or more
(%) WA notches
Spec.-grade
(%)
‘CCC’
category (%)
Below
'CCC-’ (%)
AAA 57.5 40.6 1.9 0.44
AA 41.6 28.7 23.8 1.0 5.0 0.99
A 2.5 6.2 25.9 27.2 25.9 12.3 3.05 17.3
BBB 2.9 51.5 20.6 11.8 7.4 1.5 4.4 2.06 97.1 1.5 2.9
BB 8.3 2.8 2.8 86.1 6.56 100.0 5.6 86.1
21
• In contrast to the four previous
scenarios, each of which envisioned a
set proportion of CLO collateral
defaulting, our fifth scenario starts with
the credit estimates.
• In this scenario, we assume that every
company with a credit estimate in the
‘ccc’ range experiences a default, and
every company with a credit estimate of
‘b-’ is lowered to ‘ccc+’.
• This led to an assumed 16.7% of MM CLO
collateral defaulting, and another 71.4%
being lowered to a credit estimate of
‘ccc+’ from ‘b-’.
• As with the other scenarios, the senior
CLO tranche ratings showed only modest
movement under this stress, with the
impact increasing on lower-rated CLO
tranches.
Rating Stress Scenarios | How Resilient Are Middle-Market CLO Ratings?
WA--Weighted average. Source: S&P Global Ratings.
CLO tranche rating 0 (%) -1 (%) -2 (%) -3 (%) -4 (%) -5 (%) -6 (%)
-7 or more
(%) WA notches
Spec.-grade
(%)
‘CCC’
category (%)
Below
'CCC-’ (%)
AAA 88.8 11.3 0.11
AA 92.1 4.0 4.0 0.12
A 43.2 19.8 29.6 3.7 2.5 1.2 1.06 1.2
BBB 30.9 55.9 7.4 4.4 1.5 0.90 69.1
BB 36.1 22.2 13.9 5.6 5.6 16.7 2.06 100.0 5.6 16.7
24
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