Sector developments and company hires

Moody’s puts CLOs under review
Moody's has placed on review for downgrade its ratings on 859 tranches issued by 358 US BSL CLOs (plus another 25 linked US CLO combo notes, secured notes and repacks) and 117 tranches issued by 39 European BSL CLOs. The affected securities represent 19% of Moody's US-rated BSL CLOs and 14% of its European-rated CLOs.

During its review, Moody's says it will assess the impact of the ongoing credit shocks on CLO ratings, taking into account: the credit quality of individual deals' most current portfolios; manager trading strategies; structural mechanisms, such as OC test haircuts for ‘excess’ Caa exposures; and macroeconomic and credit market conditions, including the potential for relief stemming from government intervention.

The agency says it generally strives to conclude rating reviews within 90 days, but due to the high degree of uncertainty in the current credit environment this watch-list action may take longer. Equally, the agency adds that due to the significant uncertainty over the breadth and depth of the negative effects of the coronavirus credit shock and the ongoing rating reviews on vulnerable CLO portfolio obligors, it is possible that additional CLO securities could be put on review for downgrade.

Meanwhile, Moody’s has published a breakeven analysis of the lifetime collateral asset default rates that would cause first-dollar principal losses and interest deferrals on illustrative CLO tranches at different rating levels, for both newly issued and seasoned transactions in the US and Europe. The report concludes that, as global economic conditions deteriorate behind the spread of the coronavirus, risks associated with the leveraged loans that CLOs buy are rising. However, subordination and other CLO structural features will help investment-grade tranches withstand relatively high asset defaults before registering principal losses. Across capital structures, CLO bond defaults and interest deferrals will occur at lower asset default levels in a downturn that is prolonged than one that is deeper, but shorter.

In other news…

CLO admin alliance
State Street has entered into an alliance with Virtus to provide CLO and CDO technology management solutions to clients in the US and Europe. Through this alliance, State Street will leverage Virtus’ Business Process-as-a-Service solution to provide services jointly to CLO and CDO clients. Virtus will provide collateral administration services and State Street will provide trustee services, registrar services, transfer agent services, paying agent services, bank account services and custodian services.

Conduit CMBS on review
Moody's has placed 194 classes issued by 50 US conduit CMBS on review for downgrade, affecting approximately US$4.4bn of bonds. The action impacts 159 principal and interest tranches, 32 interest-only classes and three exchangeable classes. The move reflects the agency’s expectations of increased risk of default and cashflow deterioration among loans backed by property types that are most susceptible to the coronavirus pandemic's impact on travel and consumption, as well as damage to the broader economy. Moody’s says the tranches placed on review are vulnerable to changes in credit quality based on cashflow disruptions from exposure to hotel and retail loans, in particular lower quality regional malls that have already experienced declining performance. The tranches may also be affected by significant exposure to oil metros and/or near-term loan maturities in the next 12 months. The ratings of the tranches placed on review generally range from Ca to A1 and represent approximately 2%, by balance, of the outstanding tranches the agency rates on conduit transactions.

Relief requests continue
Fitch reports that a cumulative total of 5,420 borrowers, representing 17% of the US$583.8bn US CMBS universe, have so far contacted their loan servicer to explore potential relief. Coronavirus-related transfers to special servicing total US$8.5bn, or 1.5% of outstanding CMBS. Loans secured by hotel, retail and multifamily assets continue to represent approximately 75% of relief inquiries (SCI 3 April). The most common relief requests continue to be payment forbearance, reallocation of reserves to pay debt service or fund operating expense shortages, and waivers of default for closed businesses. Borrower hardship inquiries cite non-payment notices from tenants and closed businesses due to government restrictions.

RLP liabilities settled
Following a disagreement between UK HMRC and the Mapeley loan (securitised in the Taurus 4 CMBS) opco regarding the scope of the indemnity to be provided in relation to any residual leasehold property (RLP) according to the services agreement, the parties agreed to a settlement that provides certainty around the provisions of the services agreement in connection with the expiry of the operating period on 2 April 2021. The settlement deed states that opco deliver to HMRC a £56m bond, with respect to the RLP liabilities, and a protocol be followed in order to break lease terms for certain properties to be vacated by HMRC and for the entry by opco into a property management exercise with HMRC. As such, no amount will be due in relation to the RLP liabilities prior to 2 April 2021 and the loan obligors have confirmed to the servicer that should the lease break protocol be adhered to, opco’s potential liability to HMRC will be reduced to around £28.7m. An amortisation target aims for the loan balance to reduce to £56m or less by 2 April 2021 and the delivery of a sales strategy in order to dispose of certain properties to achieve the target.