Exposure to loans of "concern" – or those rated CCC+ and below – expanded last month in US broadly syndicated CLOs tracked by Fitch Ratings, the agency said Tuesday.
Fitch said the level of exposure within US BSL CLOs to issuers with "top market concern loans" increased to 7.4% in April, from 7.0% in March.
"The [concern loans] list has grown as tightening credit markets and operational challenges increase default risk for portfolio loan issuers," the agency said.
Default levels within CLOs remained stable at 0.7%, Fitch noted.
Fitch said new-issue CLOs offer the strongest metrics in its universe of tracked deals. Exposure to loans rated CCC+ or lower averaged just 2.5% in April for new CLOs, and the new deals were issued with senior and junior overcollateralization test cushions averaging 10.2% and 5.3%, respectively.
Overcollateralization test cushions for reinvesting CLOs were at 8.6% (senior) and 3.5% (junior) last month — down slightly from comparable levels from a year ago.
CLOs exiting reinvestment periods continue to mount, as refinancing/reset options remain unaffordable for managers under current market-spread conditions, with new issue triple-A coupons pricing in a range of 183 and 225 bps over Sofr for the past 30 days. Fitch said 33% of the CLOs that it tracks are now out of reinvestment.
Also of note, according to Fitch, roughly 3% of reinvesting CLOs and 59% of CLOs out of reinvestment were failing required weighted average life covenants in April.
This article originally appeared on PitchBook News