The table below shows the industry breakdown for the US BSL CLO market, based on over 2,000 US BSL CLO deals’ underlying collateral notional amounts.
According to data posted directly by Moody’s on their official LinkedIn page, it is anticipated that five industries will experience a default rate exceeding 6.0% within the next year. Notably, US CLOs have a fair amount of exposure to three out of these five industries, as illustrated in the table. Furthermore, Moody’s projects that only two industries will witness a default rate surpassing 8.0% over the course of one year. US CLOs have relatively limited exposure to these two industries.
Overall, the information presented in the table is encouraging for investment-grade rated CLO tranches, given the more idiosyncratic and less systemic nature of defaults. High correlation among defaults is something investment-grade CLO investors seek to avoid, as it would amplify the risk of substantial portfolio losses. As long as the underlying diversified portfolios of CLOs continue to effectively limit potential credit losses throughout credit cycles, the investment-grade rated tranches will remain well insulated.
| US CLO Collateral Exposure | Moody’s Industry Name | Moody’s US 1-year Default Rate Forecast | |
| 1 | 10.3% | Banking, Finance, Insurance & Real Estate | 0.7-1.4% |
| 2 | 9.8% | Healthcare & Pharmaceuticals | 6.3% |
| 3 | 9.7% | Services: Business | 5.0% |
| 4 | 8.0% | High Tech Industries | 4.1% |
| 5 | 5.2% | Telecommunications | 7.9% |
| 6 | 4.9% | Hotel, Gaming & Leisure | 4.6% |
| 7 | 4.8% | Chemicals, Plastics & Rubber | 3.1% |
| 8 | 4.5% | Services: Consumer | 6.8% |
| 9 | 4.1% | Construction & Building | 3.4% |
| 10 | 3.7% | Media: Broadcasting & Subscription | 4.0% |
| 12 | 3.2% | Aerospace And Defense | 5.1% |
| 13 | 2.9% | Containers, Packaging & Glass | 4.0% |
| 14 | 2.8% | Capital Equipment | 3.4% |
| 15 | 2.4% | Consumer Goods: Durable | 11.1% |
| 16 | 2.3% | Transportation: Consumer | 1.3% |
| 17 | 2.3% | Automotive | 4.9% |
| 18 | 2.0% | Utilities: Electric | 0.1% |
| 20 | 1.9% | Media: Advertising, Printing & Publishing | 8.1% |
| 21 | 1.7% | Energy: Oil & Gas | 1.8% |
| 22 | 1.5% | Retail | 4.9% |
| 23 | 1.4% | Media: Diversified & Production | 2.7% |
| 26 | 0.7% | Energy: Electricity | 0.3% |
| 27 | 0.5% | Metals & Mining | 1.8% |
| 28 | 0.5% | Wholesale | 4.4% |
| 29 | 0.3% | Utilities: Oil And Gas | 0.1% |
| 30 | 0.2% | Forest Products & Paper | 0.7% |
| 31 | 0.2% | Principal Collection Account | 0.0% |
| 32 | 0.2% | No Data | 0.0% |
| 33 | 0.1% | Utilities: Water | 0.0% |
| 34 | 0.1% | Sovereign & Public Finance | 0.0% |
| 35 | 0.0% | Else | 0.0% |
The next table below shows the industry breakdown for the EU CLO market, based on over 500 EU CLO deals’ underlying collateral notional amounts.
According to Moody’s, it is anticipated that four industries will experience a default rate exceeding 4.0% within the next year. Notably, EU CLOs have a fair amount of exposure to only one out of these four industries, as illustrated in the table. Furthermore, Moody’s projects that only one industry – retail – will witness a default rate surpassing 5.0% over the course of one year. EU CLOs have limited exposure to this industry.
| EU CLO Collateral Exposure | Moody’s Industry Name | Moody’s EU 1-year default rate forecast | |
| 1 | 15.2% | Healthcare & Pharmaceuticals | 3.0% |
| 2 | 8.7% | Services: Business | 2.7% |
| 3 | 7.3% | High Tech Industries | 3.3% |
| 4 | 6.7% | Chemicals, Plastics & Rubber | 1.6% |
| 5 | 6.6% | Telecommunications | 2.8% |
| 6 | 5.4% | Services: Consumer | 2.8% |
| 7 | 5.1% | Construction & Building | 1.5% |
| 8 | 5.1% | Hotel, Gaming & Leisure | 4.1% |
| 9 | 4.8% | Banking, Finance, Insurance & Real Estate | 0.7%–2.2% |
| 10 | 4.7% | Beverage, Food & Tobacco | 2.4% |
| 11 | 4.2% | Capital Equipment | 2.3% |
| 13 | 2.9% | Containers, Packaging & Glass | 4.3% |
| 14 | 2.8% | Consumer Goods: Durable | 4.4% |
| 15 | 1.9% | Automotive | 0.8% |
| 16 | 1.8% | Consumer Goods: Non-durable | 2.7% |
| 17 | 1.7% | Retail | 5.9% |
| 18 | 1.6% | Media: Advertising, Printing & Publishing | 3.1% |
| 19 | 1.5% | Not Reported | |
| 20 | 1.5% | No Data | |
| 21 | 1.2% | Media: Diversified & Production | 1.9% |
| 22 | 1.1% | Wholesale | 1.5% |
| 23 | 1.1% | Environmental Industries | |
| 24 | 0.9% | Forest Products & Paper | |
| 26 | 0.8% | Aerospace And Defense | 1.7% |
| 27 | 0.7% | Transportation: Cargo | 1.9% |
| 28 | 0.2% | Energy: Electricity | |
| 29 | 0.2% | Energy: Oil & Gas | 0.7% |
| 30 | 0.2% | Metals & Mining | 1.4% |
| 31 | 0.2% | Utilities: Electric | 0.0% |
| 32 | 0.1% | Utilities: Oil And Gas | 0.0% |
| 33 | 0.1% | Utilities: Water | 0.2% |
| 34 | 0.0% | Sovereign & Public Finance | 0.4% |
| 35 | 0.0% | Machinery (non-ag, Non-constn & Non-elec) |
It is crucial to acknowledge that CLOs operate as managed vehicles. Given the presence of both strong and weak credits within each industry, the ability of managers to navigate these dynamics will significantly impact the overall performance of CLO tranches, especially at the equity level. Consequently, managers’ expertise in credit selection will be thoroughly tested as they strive to deliver favorable results in this challenging landscape.
Related articles:
Scoring US CLO Managers Based on 2021 Vintage Deal Performance
Scoring EU CLO Managers Based on 2021 Vintage Deal Performance
Disclaimers
The information, research, data, research-related opinions, observations, and estimates contained in this document have been compiled or arrived at by CLO Research Group, based upon sources believed to be reliable and accurate, and in good faith, but in each case without further investigation. None of CLO Research Group or its service providers; authorised personnel, or their directors make any expressed or implied presentation or warranty, nor do any of such persons accept any responsibility or liability as to the accuracy, timeliness, completeness, or correctness of such sources and the information, research, data, research related opinions, observations and estimates contained in this document. All information, research, data, research-related opinions, observations, and estimates in this document are in draft form as of the date of this document and remain subject to change and amendment without notice. Neither CLO Research Group nor any of their third-party providers shall be subject to any damages or liability for any errors, omissions, incompleteness, or incorrectness of this document. This article is not and should not be construed as an offer, or a solicitation of an offer, to buy or sell securities and shall not be relied upon as a promise or representation regarding the historical or current position or performance of any of the deals or issues mentioned in it.
