By Matt Tracy
WASHINGTON, May 8 (Reuters) – Middle market collateralized loan obligations (CLOs) have declined in credit quality as smaller corporate borrowers suffer from high inflation and interest rates, Moody’s said in a new report.
The measures of liquidity and interest coverage for middle-market borrowers rated by Moody’s have deteriorated, reflecting high debt servicing costs from elevated interest rates, the Moody’s analysis of 172 borrowers showed.
Interest coverage ratios also declined to 1.8 times from 2.0 times in the second half of 2023 from the comparable period in 2022.
Smaller borrowers, with $200 million or less in earnings before interest, taxes, depreciation, and amortization (EBITDA), saw a decline in their liquidity and debt coverage ratios as the Federal Reserve has kept rates high to tame stubborn inflation.
Moody’s noted, however, that weakening interest coverage hurt these borrowers’ credit profiles more than their actual operations.
As a result, refinancing risk for the most highly leveraged of these borrowers is high, Moody’s said. It noted, however, that the CLOs it rated contain few middle market loan maturities through 2025.
Defaults on loans within middle market CLOs climbed to a peak of 2.48% in the third quarter of 2023 from zero in the second quarter of 2022, Moody’s said.
The performance of broadly syndicated loan CLOs was much better with less than 1% of such loans within CLOs defaulting over the same timeframe.
(Reporting by Matt Tracy; Editing by Richard Chang)
