By Kristen Haunss
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 (N:MS) 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)