20180122-穆迪服务-CLO_Interest_23页_1mb

CLO Interest Summary

Core Content

This document provides an analysis of the impact of the US tax reform on the credit market, particularly focusing on collateralized loan obligations (CLOs) and structured finance. It also includes an update on the Refunding Indicator, which measures the refinancing risk for speculative-grade issuers, and a Market Pulse on CLO performance in October 2017.

Main Points

US Tax Reform Impact

• Corporate Tax Cut: The reduction of the corporate tax rate from 35% to 21% is a credit positive as it increases corporate cash flow. However, the net impact on economic growth is expected to be modest, with growth forecasted at 2%–2.5% for 2018–19.
• Sector-Specific Effects:
  • US Sovereign: Credit negative due to a $1.5 trillion deficit over 10 years.
  • Non-Financial Companies: Benefit from tax cuts and full upfront capital spending deductibility, but highly leveraged firms may suffer from reduced interest deductibility.
  • Utilities: Credit negative as lower tax rates reduce the difference between ratepayer collections and tax payments.
  • Financial Institutions & Insurance: Net positive for most, with improved profitability. However, health insurers may face challenges due to the repeal of the individual mandate.
  • Public Finance: Negative due to reduced financial flexibility and increased tax disparities.
  • Structured Finance: Generally positive, but some transactions may face negative impacts due to reduced tax incentives for homeownership and potential effects on home prices.

Refunding Indicator Update

• Spec-grade Issuers: Refunding risk has improved in 2017, with the Three-Year Refunding Indicator rising to 3.9x in December 2017, up 16% year-over-year.
• One-Year Refunding Indicator: Increased to 8.5x in December 2017, up 12% from the previous year. Despite progress, it remains 26% below its historical average, indicating elevated short-term refinancing risk.
• Refunding Risk Trends:
  • Refunding conditions for Caa- and Ba-rated debt improved compared to December 2016.
  • B-rated debt saw worsening conditions.
  • High-yield bond issuance in 2017 reached $207 billion, up 18% from 2016, but refinancing risk remains high relative to the 10-year average.

CLO Market Pulse – October 2017

• Performance Metrics:
  • WARF (Weighted Average Rating Factor) improved for US and European CLO 2.0s.
  • Defaults increased significantly for US CLOs, with notable defaults such as Concordia International Corp and Toys 'R' Us.
  • Caa Holdings declined for all cohorts except European CLO 2.0s.
  • Senior OC (Over-Collateralization) levels declined for both US and European CLO 2.0s, mainly due to defaults and asset sales.
  • Junior OC levels also declined slightly for US CLO 2.0s.
  • Cash Levels increased for US CLOs and declined for European CLOs.
  • WAL (Weighted Average Life) increased for US CLOs and remained stable for European CLOs.

Key Information

• CLO Structure: CLOs are primarily backed by loans to highly leveraged companies, which may face higher tax obligations due to new interest deductibility limits.
• Risk Profile: Over half of CLOs issued since 2010 have obligors with a weighted average rating of B2 or below, highlighting the market's vulnerability.
• Housing Market Impact: The tax reform may slow house price growth in high-tax areas and reduce the attractiveness of homeownership, which could negatively impact RMBS (Residential Mortgage-Backed Securities).
• Uncertainties: The full credit impact of the tax reform is difficult to assess due to the complexity of the bill and the time required for regulatory implementation. Some provisions may affect the economics of new securitizations but not the credit quality of existing transactions.
• Inflation and Interest Rates: The tax cuts are expected to lead to modest inflationary pressures, potentially resulting in 2–3 rate hikes by the Fed in 2018. The 10-year yield is projected to rise to around 3% by the end of 2018, and possibly to 4% by 2022.

Summary Table

Conclusion

The US tax reform is expected to have a modest positive impact on the economy and equity prices, but sector-specific credit risks remain. The Refunding Indicator shows improved refinancing risk, but it is still historically high. The CLO market experienced mixed performance in October 2017, with defaults rising for US CLOs and WARF improving for both US and European CLO 2.0s. Overall, the tax reform is credit positive for structured finance, though some transactions may be negatively affected.