• Funds managed by GoldenTree, Halcyon have biggest exposures
  • Exposed CLOs could deliver losses to junior investors

Collateralized loan obligations that were created after the financial crisis in the U.S. have material exposure to the commodities sector, which poses an increased risk to investors due to the plunge in crude prices.

That’s the finding of a report published yesterday by Moody’s Investors Service, which shows that as of June the top 20 individual CLOs with the largest exposures to companies in the commodities-related sector ranged from 14.4 percent to 21.3 percent of their holdings. A fund managed by GoldenTree Asset Management LP had the biggest exposure followed by two CLOs issued by Halcyon Asset Management LLC, the report shows.

"We are increasingly concerned about default risks among borrowers affected by commodity markets," Ramon Torres, a Moody’s analyst, said in the report. "Market signals also suggest increased defaults in the future."

Energy and mining companies pushed the number of defaults among speculative-grade issuers in the U.S. to a three-year high of 15 in the second quarter from 10 in the first, according to Moody’s. Loans issued by oil and gas companies such as Fieldwood Energy LLC and American Energy - Marcellus LLC have plunged, signaling investors’ concern.

U.S. crude prices have collapsed from last year’s peak of $107.26 a barrel to less than $47 on Thursday, cutting into cash flows of borrowers in the industry.

About 14.6 percent of CLOs raised after 2009 had at least 10 percent of their assets in the oil-and-gas or metals-and-mining industries as of June, according to Moody’s.

Underweight

The GoldenTree fund cited by Moody’s is "underweight" in the commodities sector "in keeping with our investment views over the past 24 months," according to Jeff Burke, a GoldenTree portfolio manager. It "holds only a fraction of the assets of the GoldenTree Credit Opportunities Master Fund," which has commodities exposure of about 10 percent, he said.

"Fifty to sixty percent of Halcyon’s energy exposure is invested in companies that are less correlated to commodity prices," said Brian Yorke, a loan portfolio manager at Halcyon. He said those sectors include midstream, pipeline and refining companies, and their related loans are trading around 95 cents on the dollar on average in the firm’s portfolio.

Many managers bought "opportunistically" in the first half of this year amid a decline in loan prices, increasing their median commodity exposure to 6.6 percent in June from 6.3 percent in January, according to the Moody’s report.

CLOs buy high-yield loans and slice them into securities of varying risk and return.

"CLOs with the largest exposures could suffer credit losses on their junior notes should there be widespread and correlated distress among issuers in these sectors,” Torres said.

There is, however, a bright side.

"Even as most CLOs we rate have only modest commodity exposures, they have also largely avoided the riskiest issuers, two factors that will help insulate the broader CLO universe from potential negative credit events in these industries," Torres said in the report.

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