U.S. broadly syndicated loan (BSL) CLOs under Fitch Ratings' surveillance had noticeable portfolio-quality erosion and concentration limit excesses in April 2020, Fitch shows in its inaugural Monthly U.S. CLO Index. In just one month - since March data displayed in our quarterly U.S. CLO Index - Watchlist and default exposure has jumped and junior overcollateralization (OC) cushions have compressed, among other deterioration observed.

Overall exposure Watchlist and defaulted issuers surged to 15.7% in April, from 9.6%. This is after our Watchlist increased by nearly 50% in the three months to March 2020. The Watchlist consists of exposure to Fitch's Top Loans of Concern and otherwise rated 'CCC+' to 'C' and the increase was primarily due to more exposure to issuers rated 'CCC+' to 'C'.

Exposure at the 'CCC' category (including +/-) has increased, causing the number of CLOs under Fitch's surveillance that have exceeded their concentration limits to soar. 'CCC' concentration is indenture specific; for example, some CLO indentures refer to issue ratings, while others use issuer ratings to calculate concentration.

The credit quality movement of CLOs is largely due to the downgrades of leveraged-loan issuers. Fitch counts ratings placed on Rating Watch Negative in this negative rating activity. Business services and gaming, leisure and entertainment issuers contributed the most to downgrade activity. More than half of these issuers, as well as energy, oil and gas, and retail exposure within CLOs, have been downgraded in the past two months.

The downgrade activity has also resulted in weighted average rating factor levels weakening (increasing). The average had moved by more than two points to be 36.7 in April. The 'B' level weighted-average rating factor is 32.2, while for 'B-' it is 40.6.

The Monthly U.S. CLO Index provides data on the above factors, as well as for tends in rating loss rate cushions, 'CCC' concentration excesses, and recovery rate distributions, among others.