对于杠杆贷款和CLO来说前景黯淡这对资本市场和银行有何影响

1、Global Research1 June 2020US Financial ServicesSkies darken for levered loans and CLOs, what are the implications for capital markets and banks?Despite the strong market rally, credit risk surfaces in levered loans (LL)May is on track for the highest month of LL defaults since 2014 ($10 bn through 5

2、/21) and default rates are accelerating. Moreover, the Feds Main St lending program is unlikely to provide relief to these borrowers given high lender participation rates (noted here). Further, the speed of LL downgrades combined with defaults has led some CLOs to begin to fail OC tests and hundreds

3、 of mezz tranches of CLOs are slated for downgrades as well. Given this increasing stress, we are updating our prior analysis.1Q marks a reminder of potential risks for IBs, but loan books are larger risks The bulge bracket IBs largely experienced marks on their bridge financing books in 1Q, althoug

4、h the headwinds were manageable and should remain that way. Notably, some firms (BAC, BARC, JPM, and Citi) have underwritten more unrated levered loans over the past six months and those credits could carry more risk, in our view. Encouragingly, GS, MS, CS, and DB have largely avoided these unrated

5、deals. Given investor concerns over the brokers loan books, we compared the brokers ALLL vs other large lenders (Figure 15) and while the brokers loan books are riskier, the reserve ratios are comparable (and seem high for GS). Further, GS recently flagged that provision in 2Q could be greater than

6、in 1Q and given the fact that the exposures at the brokers are quite similar in quality, we believe the same could be true for MS.Alts: Modest CLO exposure broadly but deferrals could represent a headwindIn terms of fee exposure, we estimate CLOs accounting for 3-8% of mgmt fees for APO, CG, ARES, w

7、ith the least at APO. Importantly, roughly half of the CLO fees are senior, while the remainder are subject to deferral if the CLO fails its OC test. In a severe scenario, with half of subordinated CLO fees deferred, we estimate that near- term earnings could be reduced by up to 6% for CG and ARES,

8、with less impact to APO.Rating Agencies: Challenging environment for loans/CLOs; exposure limited While expectations for CLO and LL issuance this year are fairly negative (MCO expecting a y/y decline of 40% in LLs; both companies expecting 30-40% declines in CLO activity), exposures have become more

9、 limited. We note that these products represent only 9% of TTM revenue (through 1Q20) for MCO (vs. 12% TTM through 1Q19) and 6% for SPGI (vs. 7% prior).Financial ServicesAmericasEquitiesBrennan Hawken, CPAAnalyst HYPERLINK mailto:brennan.hawken brennan.hawken+1-212-713 9439Daniele BrupbacherAnalyst

10、HYPERLINK mailto:daniele.brupbacher daniele.brupbacher+41-44-239 1493Stephen Caprio, CFAStrategist HYPERLINK mailto:stephen.caprio stephen.caprio+44-20-7567 5788Alex Kramm, CFAAnalyst HYPERLINK mailto:alex.kramm alex.kramm+1-212-713 4060Saul MartinezAnalyst HYPERLINK mailto:saul.martinez saul.martin

11、ez+1-212-713 2491Matthew Mish, CFAStrategist HYPERLINK mailto:matthew.mish matthew.mish+1-203-719 1242Jason Napier, CFAAnalyst HYPERLINK mailto:jason.napier jason.napier+44-20-7568 5037Adam Q. Beatty, CFAAnalyst HYPERLINK mailto:adam.beatty adam.beatty+1-212-713 2481Tommy Kaminsky Associate Analyst

12、HYPERLINK mailto:tommy.kaminsky tommy.kaminsky+1-212-713 2471 HYPERLINK /investmentresearch /investmentresearchThis report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 17. UBS does and seeks to do business with companies covered in its researc

13、h reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.We are updating our analysis from March of the risk in l

14、evered loans and CLOs, as the early signs of deterioration in credit performance have emerged. Specifically, we have seen default rates in levered loans begin to pick up, and while default rates are higher than we have seen in many years, they remain below the levels seen in the global financial cri

15、sis (GFC). However, rating agencies have begun to change ratings more quickly and proactively, which has led to a spike in downgrades.Figure 1: Levered loan defaults as of 5/21 were higher than in any month since 2014Monthly Defaults (in $ bn)$10$9$8$7$6$5$4$3$2$1$0Source: LCD, an offering of S&P Gl

16、obal Market Intelligence; S&P/LSTA Leveraged Loan Index. Data through 5/21Figure 2: The downgrade to upgrade ratio exceeds the GFC and suggests further credit deterioration30252015105Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-1

17、6 Mar-17 Mar-18 Mar-19 Mar-200Source: LCD, an offering of S&P Global Market Intelligence; S&P/LSTA Leveraged Loan IndexUBSs credit strategists believe we are in the 3rd or 4th innings of the downgrade cycle (see recent note), which will result in CCC loans rising to one-third to half of outstanding

18、LLs. Given that CLOs are highly illiquid and difficult to value, acceleration in default / recovery risk on underlying debt securities increases the likelihood of markdowns for the CLO holder. Further, as CLOs often have limits on how much exposure they can have to CCC-rated loans, some managers may

19、 be forced to unload a portion of these holdings, which would crystalize losses.Of course, the risk to the outlook for these credits is subject to macro factors, but deteriorating credit trends were emerging before COVID emerged, so this stress does not seem purely related to the shutdown. Further,

20、a gradual opening of the economy does not mean credit issues that emerged recently will disappear (since revenues could be constrained for some time), particularly for more levered entities.Underwriting / arranger exposure seems manageableTo update our earlier analysis on levered loan exposures, we

21、are focusing on activity since 9/30/2019 (to further narrow the most likely risk on investment bank balance sheets) and are highlighting the ratings of those deals vs. the market to show where relative risk resides. Also, given the structural enhancements to risk management around CLOs by investment

22、 banks, we are focusing on levered loan underwriting, as we see greater risk from bridge/event books instead of CLO warehouses (which are largely funded by 3rd party equity). Given that levered loans are inherently risky instruments, maintaining a risk profile similar to the industry should not be v

23、iewed as indicating limited absolute risk, but rather that relative to other firms, loan losses could be less severe as we have begun to see defaults accelerate.The brokers have avoided the unrated bucket, which seems prudentWhen assessing new issuances (including refi), MS seems to have underwritte

24、n loans that are a bit riskier than the overall market, while GS was slightly more disciplined from a quality perspective. Importantly, both have largely steered clear of nonrated loans, which are harder to assess and likely skew higher risk, in our view. For example, if a borrower could secure a ra

25、ting equal to or greater than single-B, then they probably would, unless they were in a position where their relationship with their lender was firmly established (reducing the need for ratings).Notably, although mark-to-market holidays for CLOs while they are in the process of being arranged may al

26、low brokers to avoid noise in reported results as a result of some of these exposures, we believe such lack of disclosure could reduce investor confidence in reported results.Figure 3: GS rating skew seems somewhat barbelledFigure 4: MS volumes contain less higher-rated credit (butalso less unrated

27、credits)50%40%30%20%10%0%BBB- BB+ BB BB- B+BB- CCC+ CCC CC NRGoldman SachsIndustry50%40%30%20%10%0%BBB- BB+ BB BB- B+BB- CCC+ CCC CC NRMorgan StanleyIndustrySource: Bloomberg Index Services, S&P LCD, UBS Global ResearchSource: Bloomberg Index Services, S&P LCD, UBS Global ResearchSmaller brokers see

28、m to be taking more riskWhile we do not cover Jefferies, investors have focused on the risk in that firms underwriting activity in the past. Therefore, while we do not have a formal opinion on JEF shares, we have included the risk profile of that activity as well.Figure 5: JEF skews to the lower end

29、 of the credit spectrum50%45%40%35%30%25%20%15%10%5%0%BBB-BB+BBBB-B+BB-CCC+CCCCCNRJefferiesIndustrySource: Bloomberg Index Services, S&P LCD, UBS Global ResearchMoney centers show relatively lower risk but the NR buckets are largeJPM and BAC continue to be the most active in the levered loan market,

30、 in terms of both total deal value and new money issuance. When looking at their rated credits, both banks are generally of a lower risk profile than the market broadly. While better credit ratings are not necessarily an indication losses will be lower, it is encouraging to see the activity levels a

31、re at higher ratings than the broad market. Further, a lower risk profile would be in line with business models that are more closely aligned with corporate clients and more “vanilla” IB models.That said, JPM and BAC tended to issue a higher proportion of unrated debt relative to the overall market,

32、 which makes their risk profile more challenging to accurately quantify. While unrated loans are not a definitive sign of greater risk, we believe it is appropriate to assume such loans are generally riskier than the market on average.Figure 6: JPM overweight higher-quality creditFigure 7: BACs rate

33、d exposure skews to higher end50%40%30%20%10%0%BBB- BB+ BB BB- B+BB- CCC+ CCC CC NR50%40%30%20%10%0%BBB- BB+ BB BB- B+BB- CCC+ CCC CC NRJP MorganIndustryBank of AmericaIndustrySource: Bloomberg Index Services, S&P LCD, UBS Global ResearchSource: Bloomberg Index Services, S&P LCD, UBS Global Research

34、Citi volumes are mainly concentrated in B+ or higher rated credits, which is generally encouraging given the banks strong presence as a CLO arranger and mixed history of risk management. Notably, Citis nonrated issuance during the period reverted back to the industry average after spiking in 2019. I

35、t is important to note that Citis total loan volume is small, so any risks should be manageable.Figure 8: Citi issued disproportionate amount of B+ credit50%45%40%35%30%25%20%15%10%5%0%BBB-BB+BBBB-B+BB-CCC+CCCCCNRCitigroupIndustrySource: Bloomberg Index Services, S&P LCD, UBS Global ResearchEuropean

36、 banks display range of risk appetites in US marketsCompared to our prior analysis, European banks below collectively issued less new money on US-marketed, non-IG loans (down 33% vs the market down 27% according to Dealogic). That said, Deutsche Bank appears to be the most risk- averse in this marke

37、t, with issuance skewing heavily towards BBB- credit. As a result, its projected default rate is among the lowest of the overall group (see Fig. 12).Figure 9: DBK exhibiting cautious approach60%50%40%30%20%10%0%BBB-BB+BBBB-B+BB-CCC+CCCCCNRDeutsche BankIndustrySource: Bloomberg Index Services, S&P LC

38、D, UBS Global ResearchCredit Suisse is significantly underweight the industry in the nonrated bucket (which is encouraging in our view given the less predictable range of outcomes associated with such loans), but is overweight B/B+ exposure as a result. On the contrary, Barclays rated issuances skew

39、 towards more favorable categories, but a proportionally greater amount of nonrated loans creates greater uncertainty.Figure 10: CS concentrated in B/B+ creditFigure 11: BARC more active in nonrated issuance50%50%40%40%30%30%20%10%0%BBB- BB+ BB BB- B+BB- CCC+ CCC CC NR20%10%0%BBB- BB+ BB BB- B+BB- C

40、CC+ CCC CC NRCredit SuisseIndustryBarclaysIndustrySource: Bloomberg Index Services, S&P LCD, UBS Global ResearchSource: Bloomberg Index Services, S&P LCD, UBS Global ResearchFraming potential default rates based on underwriting activityLooking ahead, we can deduce that non-IG default rates at the un

41、derwriter level will be impacted (in varying degrees of severity) by the performance of nonrated loans. As a result, those with proportionally less exposure to such loans appear to have more limited downside risk. In order to illustrate this, in the table below we took new levered loan issuance and

42、applied the long term average default rate foreach rating modifier in order to project one-year default rates on the rated portion of their books. We then applied both the single-B (bull case) and CCC (bear case) historical default rate to each banks nonrated issuances. The resulting default rate sc

43、enarios illustrate the variance in possible outcomes that stems from performance of nonrated loans, which is most evident among the money centers.Figure 12: Projected one-year defaults ($ mn) on trailing 10 month new money issuance(at B default rate)(at CCC default rate)(bull case)(bear case)Bank of

44、 America$563$675$5,7092.05%10.39%JP Morgan$872$457$3,8662.22%7.91%Credit Suisse$618$7$602.12%2.30%Goldman Sachs$468$16$1352.80%3.49%Deutsche Bank$84$38$3180.73%2.41%Wells Fargo$47$195$1,6482.07%14.48%Jefferies$599$18$1565.84%7.14%Citigroup$121$67$5702.02%7.40%Morgan Stanley$157$0$02.05%2.05%Barclays

45、$66$65$5472.00%9.37%Industry Total$4,526$1,903$16,1032.40%7.70%Lead AgentRated loansNonrated loansNonrated loansWtd avg default rateWtd avg default rateSource: S&P LCD, UBS Global Research estimates Note: Figures based on S&Ps one-year global corporate average cumulative default rates by rating modi

46、fierCLO investments tend to be higher rated, so most likely risk is from RWA inflationHoldings of CLOs among the brokers has declined vs a few years ago and is quite limited. For the trust banks, the investments do represent a substantial portion of TBV, but are effectively all (99%) in AAA tranches

47、, which reduces the risk of loss in our view. However, we see a risk that AAA tranches of CLOs could be downgraded to double or single-A if the collateral continues to deteriorate. For example, Moodys has already placed almost 900 tranches of CLOs on review for downgrade (link to story), which inclu

48、de single-A tranches. If collateral deterioration continues, higher-rated tranches seem at risk of downgrades.In the event of deterioration of underlying collateral, banks could see RWA inflation related to these assets, as lower-rated securities receive higher risk weights or would have greater ris

49、k in their internal risk models. Given STT and BK are the firms more exposed to this risk, and Tier 1 leverage is their binding capital constraint, and CET1 ratios reflect a substantial excess capital position, we view those risks as manageable. Currently both STT and BKs CET1 ratios are over 250 bp

50、s above their minimums.5.020%4.518%4.016%3.514%3.012%2.510%2.08%1.56%1.04%0.52%0.0BKSTTStructured ProductsGS($ bn)MSStructured ProducNTRSs / TBV0%Figure 13: CLO holdings as % of TBVtSource: UBS Global Research, FR Y-9CThe experience so far shows some riskCLOs have shown some volatility in fair value

51、 this year, with 1Q resulting in markdowns of roughly 5% on AAA tranches, which shows that claims of CLO managers that these are not mark-to-market instruments did not insulate holders from volatility. Nonetheless, most of the NT risks in CLOs are focused on the equity and mezz layers, in our view.

52、If collateral deterioration continues and CLO managers need to adjust as CCC buckets get too large, this could result in forced sales, crystalizing losses and pose a threat to payouts of higher-rated tranches.The loan books of the brokers have been a focus, which is understandableWhile MS and GS are

53、 generally viewed as having less exposure to credit than traditional commercial banks such as the money centers, they do have loan books, primarily tied to their IBD and securities businesses. These loan books tend to have more exposure to sub-investment grade credits, but this risk is managed via l

54、arger secured loans. In comparing reserve positions, GS tends to have a larger reserve than MS, but the disclosures of these loan books does not allow for perfect comparisons. Specifically, GSs allowance is to all wholesale loans, while MSs is based on HFI loans in its ISG business, so while it is p

55、robably the best overlap possible, it is imperfect. Assessing the IG exposure of MSs CRE and corporate loan book (which does not line up with its ISG disclosure but is similar to GSs wholesale category), then 42% of the loan book would be investment grade. Nonetheless, while GSs loan book has drawn

56、investor scrutiny, which we believe is fair, the firm seems to be conservatively reserved for this risk, based on our analysis.Figure 14: The brokers tend to have more credit risk in their corporate/wholesale loan booksFigure 15: Although reserves appear comparable, and in the case of GS, conservati

57、ve75%25%CJPMIG38%60%GSMSNon-IGNR2.0%1.8%1.6%1.4%1.2%1.0%0.8%0.6%0.4%0.2%0.0%1.81%1.16%1.07%0.88%0.87%27%70%73%27%GSBACMSCJPMALLL % (funded only)ALLL % (funded & unfunded)Source: Company reports, UBS Global Research Note: Credit quality metrics reflect funded corporate/wholesale loans held for invest

58、ment. BACs credit quality disclosure is inconsistent with others, so has been excluded from this analysisSource: Company reports, UBS Global Research Note: Allowance metrics reflect HFI corporate/wholesale loans and lending commitmentsFurther, GS recently flagged that provision in 2Q could be greate

59、r than in 1Q and given the fact that the exposures at the brokers are quite similar in quality, we believe the same could be true for MS.Alt asset managers have limited direct exposure to CLOsAs concerns about leveraged lending and CLOs continue to garner attention, many investors have naturally foc

60、used on potential risks at the alternative asset managers. While we can understand the negative sentiment around the group, we view economic exposure as modest.CLOs are not central to the business of the alternative asset managers, although deteriorating performance in those markets could clearly le