November 13, 2015 / 3:17 PM / in 3 years

TRLPC: Energy-heavy US CLOs trade down in secondary amid volatility

NEW YORK, Nov 13 (Reuters) - Investors are shying away from US Collateralized Loan Obligation (CLO) funds with high energy holdings and the value of their debt is falling in the secondary market as CLO issuance tumbles in a turbulent environment for the biggest buyers of leveraged loans.

US CLOs have an average exposure of about 3% to oil and gas companies, but nearly 20 funds hold more than 10% of assets from the troubled sector, according to Thomson Reuters LPC Collateral data. The 16% drop in oil prices since the start of the year has weighed on these portfolios.

“The oil and gas sector has the highest share in total distressed collateral of US CLOs,” Morgan Stanley analysts led by Richard Hill wrote in a Nov. 5 report. “Investors need to take note of both the overall CLO exposure to these sectors and the relative level of distress in each sector.”

Average bids on US oil and gas loans have fallen 7.3% in the secondary market this year to 83.37 on Nov. 10, and 10.1% from a 2015 peak of 92.78 on May 14, according to LPC data, as defaults by energy companies increase.

US CLO issuance is lagging 2014’s record volume as the industry attempts to deal with market volatility and looming regulations. There has been US$87.5bn of CLOs arranged in the US this year, compared to US$107bn in the same period of 2014, according to LPC Collateral data.

Spreads on AAA slices, the largest part of CLOs, widened to 152bp on Oct. 16 and BB spreads were at 750bp, according to Morgan Stanley data, as investors seek higher pricing in a volatile market. Allstate issued a US$501m CLO in November with a US$280m AAA slice that pays 170bp, which is among the highest priced senior tranches this year, according to LPC Collateral data.

Recent Bids Wanted In Competition (BWIC) sales of CLO tranches in the secondary have shown that funds with significant energy exposure either trade at lower levels than managers with less energy holdings or does not trade, sources said.

In a sample of approximately 920 US CLOs, about 18 have oil and gas exposure of more than 10%, with three holding 14-14.5% of the portfolio in that sector, according to LPC Collateral as of Oct. 21. More than 480 CLOs have exposure of 3-10% and another 44 have holdings of less than 1%. Almost 100 CLOs in the sample have no energy exposure.

The five most widely held oil and gas names in US CLOs at the end of September were Ocean Rig, which is bid at 62% of face value; Seadrill at 57%; Energy Transfer Equity, with one loan at 96.8% and the other at 94.7%; MEG Energy Corp at 94.5% and Sheridan Production Partners at 69%, according to LPC data.

The percentage of loans trading below 90 cents on the dollar in US CLO 2.0 portfolios increased to the highest level this year at near 11% at the end of October compared to 8% the prior month, according to the Nov.5 Morgan Stanley report.

The oil and gas sector had the highest share of loans trading below 90 at 22.7% of the total distressed collateral in US CLOs, followed by computers and electronics at 7.7%, according to the report.

Oil and gas borrowers accounted for 7.8% of all issuance in the US leveraged loan market through the end of September with US$41.8bn of loans, according to LPC data. Volume is 43.6% lower than the US$74bn arranged during in the same period of 2014.

Higher risk in the troubled sector is being reflected in rising primary pricing on leveraged loans. All-in spreads on new issue oil and gas institutional loans averaged 833bp in 2015 at the end of September, compared with 654bp in 2014, according to LPC data. Excluding second-lien loans, all-in spreads in the oil and gas sector rose to 820bp from 560bp.

Average bids on troubled energy loans were the second-lowest of any sector in the US secondary market at the end of the third quarter. Only mining companies, which have suffered from the drop in commodity prices, have lower average bids.

In this year’s Shared National Credit review, US regulators found that oil and gas loans totaling US$276.5bn made up 7.1% of the portfolio of large loans, according to the report released Nov. 5. Classified commitments for oil and gas companies’ loans, rated substandard, doubtful or loss, totaled US$34.2bn, or 15% of total classified commitments, compared with US$6.9bn or 3.6% in 2014.

The review “noted an increase in weakness among credits related to oil and gas exploration, production and energy services following the decline in energy prices since mid-2014,” the regulators said in a Nov. 5 news release. (Editing By Tessa Walsh and Jon Methven)

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