S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Hello, and welcome to this S&P Global Ratings live webinar entitled, European CLOs: Where Do We Go From Here? Today, we'll be giving a roundup of several CLO-related hot topics that have been keeping us busy over the past few months. On this occasion, that will include the maturity pipeline and the amend-and-extend practices for the underlying leverage loans, some analysis of the latest features we're seeing in CLO documentation and finally a look-back at the extent to which European CLO managers were able to preserve or build par last year. I'm Andy South, Head of European Structured Finance Research in the EMEA Region. And I'll be moderating this webinar. First, I'd just like to give you a quick overview of the web console that you're looking at. So this webinar comes with audio and a slide presentation. On your left, there's a Q&A box. And in there, you can submit questions at any time. You don't have to wait until the end of the speaker's remarks to do that, although we will do the Q&A at the end. Also, on your left is the resource books, where you can download some materials related to today's presentation, including commentaries that we've published recently on some of these topics. And finally, please help us by completing a short survey at the end of the webinar as we'd love to hear your feedback. So with me today are my colleagues, Marta Stojanova from our corporates team as well as Sandeep Chana, Charlie Miquel and Shane Ryan from our CLO team. And they'll be drilling down shortly into those topics that I outlined earlier. Firstly, I'd just quickly like to set the scene and update you on how we see CLO issuance and credit performance at the moment. European CLO issuance year-to-date at the end of April is shown in the sort of right-hand blue bar on the screen and the other blue bars for other years at end of April in those years. So you can see that compared to that point last year, just some EUR 8 billion is actually down by about 1/3 compared to the first 4 months of 2022. And at least part of that is due to the rather lackluster underlying origination volumes in the leveraged loan and high-yield bond markets, which you can see here, which really hit multiyear lows in 2022. And so that's clearly linked to lower CLO formation. That said, there has been a bit of a pickup over the past few months in that area. This is kind of linked to the first topic that Marta and Sandeep will talk about on sort of the environment for refinancing, et cetera. Just to look at briefly in a couple of ways at CLO performance. I mean, this is a long-term picture, so I should explain this. CLO performance in Europe has basically been very good throughout its entire history. So this heat map shows all the tranches we've ever assigned to a European CLO. Along the bottom, you have the different vintages of transaction or tranche. And then up and down, the higher up the screen you go, that's top of the capital structure, so AAAs at the top, Bs at the bottom. The green areas are tranches which have, since they were issued, paid down, so they're gone. And the red ones are the only ones that defaulted. So in other words, there's very little red on that map. The red, the defaults that did happen, were all in very early vintage CLOs and all in tranches which were very low down the capital structure. And in fact, only about 0.5% of all those tranches, 0.5% of the area of that diagram is red. In other words, only 0.5% have ever defaulted. So that's a sort of positive performance overall. It's challenging to compare CLO or any other structured finance ratings performance, default rates, et cetera, with other sectors. But in attempt to do that, here, we can see the 8-year, just to take an example, the 8-year average cumulative default rates per rating category for European corporates and then for European CLOs. So the first thing to say is that in both cases, they sensibly rank all of the default risk. So clearly, higher ratings have a lower -- on average, have a lower default rate. And that's true of the corporates and the CLOs. But then actually, the CLO defaults that there have been, albeit very few, did occur much less of the investment-grade levels or not at all in the high investment-grade levels, and actually, if anything, were a bit lower on and 8-year basis than for the European corporates that I'm comparing them with here. Just to sort of talk, instead about defaults, talking about ratings transitions, this chart shows you a rolling sort of ratings drift in terms of number of notches of drift over a 12-month trailing period. SC, structured credit, so that is largely CLOs. These days, that is almost entirely CLOs. And you can see that, that has been, over the last few years, it's close to the 0 line, which essentially means that ratings have been neither going up nor down on average over a 12-month trailing period. It's not quite as high. There's actually positive numbers for some of the other European securitization asset classes, like RMBS, where when times are good, in fact, those deals tend to see upgrades because the deals are amortizing. And of course, the CLOs, often they don't get to the stage of amortizing significantly because they are refi-ed or reset but essentially very stable ratings for European CLOs regardless of defaults, just not much movement up or down of the ratings either. And then if you take a specific case of a recent period of stress, so let's look here at the period from early to late 2020. This actually shows again all the ratings we had, just an absolute count of the tranches we had outstanding on European CLOs where we had ratings, how many of them did we put -- did we feel the need to put on CreditWatch negative around about the time of the onset of COVID-19. So in other words, all the blue ones, note, there was no action at all. The other colors there, those are the ones which were put on CreditWatch negative. So it's only a very small proportion. And then what happened after that, so in fact, 1/3 of those even were actually affirmed with no rating change in the end, about 2/3 were lowered, but most of them only by 1 notch. So again, it's just another example of showing you how even through a recent period of stress, COVID-19 ratings movements on CLOs have been absolutely minimal. Just to try and look -- make it more forward-looking, where are we in the current picture or the current stressed environment. This shows you the average proportion of CLO portfolios that we look at that have -- sorry, the average proportion that are CCC-rated credits underlying them. That's not backed down. The middle line is the average. And then you see the sort of spread across the different deals around that in terms of percentiles. The average number is not quite as low as it was pre COVID-19, but it is around only 4.5% -- 4% to 5%, that sort of area, has gone up a little bit through 2022, but it's still sort of relatively stable. So the pools are managing to maintain -- at least on that metric, maintain credit quality broadly speaking for now. Looking genuinely forward, this is our forecast of speculative-grade corporate default rates for the U.S. and Europe. So they have ticked up already. We expect them to continue ticking up over the next 12 months or so. But then again, if you compare the sort of scale of that with, let's say, the spike that happened during the COVID era, then clearly the ratings on the CLOs didn't have a real problem during the COVID era. And if the default rate continues to be of that sort of magnitude, then you would expect the same thing again this time around. Okay. So that's just a very broad brush update on performance and issuance. I'm now going to hand over to Sandeep and Marta in a minute to talk about amend and extend. I mean, some of what I mentioned earlier on CLO issuance trend is clearly to do with the environment for the underlying leverage loan originations and whether corporates need to refinance, whether they want to in current conditions and whether they have the option to do something else like extend a loan. So to discuss that, as I say, let's hand it over to Sandeep and Marta. Over to you.

Many thanks, Andy, and good morning, afternoon and evening to everyone. So over the next 10 minutes or so, we're going to focus and cover the topical themes surrounding A&E and the upcoming maturity wall. And that's both from a CLO perspective and what we're seeing in the overall leveraged loan space. So let me be specific when I discuss. From a CLO context, we're going to focus in particular on what we are referring to as near-term maturities of loans in the CLOs. And those are all those loans that sit in siloed portfolios, which have a maturity date anywhere between now and the end of 2025. And what we're going to do from there is take a deep dive into those specific names and how they are positioning themselves in today's market in terms of refinancing. So let me first start by setting the seat. So it might come as a bit of a surprise to everyone on the call, but our view is quite simple. Whilst the market this year is undergoing a number of refinancing [ than A2s ] as we speak, we actually think that the refinancing play is actually going to play a much bigger role next year rather than this year. Why do we say that? Well, if you look at the chart, starting on the left-hand side, what we're showing -- our data is showing us is that just under EUR 20 billion of debt, which underlies CLO portfolios. And that translates to around 16% of total par. So if you add up all CLO portfolios together, it's coming due between now and the end of 2025. Yes, absolutely, a large majority of that debt is maturing in 2025. And that's why we are emphasizing that the refi A&E activity will play a much bigger issue next year relative to this year, i.e., corporate borrowers will start coming down to their lenders and thinking about refinancing proposals next year in order to refi ahead in 2025. Now let's speak about the headwinds. Let's talk about the right-hand side. Now at the same time we're seeing this maturity wall coming closer, the proportion of CLOs ending their reinvestment period is increasing. Now by S&P's count, currently as it stands, there are around 55 CLOs that have already exited their reinvestment periods. And by the end of this year, that's going to increase by another 12. That's per banks context. That's just over 1/5, so around 22% of the CLO market that's going to exit its reinvestment period, notwithstanding, of course, any further new issuance. Now of course, this is a challenge for CLOs, right, seen as reinvestment criteria after the reinvestment period becomes more restrictive, right, meaning that they become more increasingly difficult for CLOs as lenders to accept refinancing requests that are coming into the market. There are tests, right? There are covenants that CLOs need to maintain in order to accept these kind of proposals that come through. A quick note on the table on the right-hand side, just shows the number of CLOs that have ended their reinvestment periods depending on the year and those which are actually amortizing their AAA bonds. So it's not always the case that they're amortizing their bond straightaway. It may take a bit of time for them to start amortizing their portfolios. Going back to those tests as I mentioned earlier. Now of course, one of those tests, key tests are represented by the WAL test. And our statistics and data shows from here is that the cushion on WAL tests are starting to thin or otherwise are actually now failing. And the analysis that we've done here, which actually we first called in September 2022, this is just an updated version of it, what we've done here on the vertical axis, essentially just aggregate the notional amount of all of those near-term maturities I was referring to earlier for each CLO portfolio that we rate. And we just divided it by the notional of the CLO portfolio. What we see from here is that those CLO portfolios with the largest proportion of near-term maturities also happen to be those deals which have thinning or failing WAL tests. They seem to be further away. So there is a distinct correlation between these two parameters. And then of course, if you take it to the right-hand side, if you look at CLOs again with near-term maturities versus how many years left they have in their reinvestment period, you see a similar trend. Those which are outside or coming close to the end of their reinvestment period happen to be those CLOs with the large proportion of near-term maturities. So it's interesting, right? Because at this point, we come to an important juncture. It's evident that CLO issuers today are increasingly utilizing, if not their reinvestment criteria, that all-important maturity or credit amendment language. So for the well-versed of you who are in the call today and you read your OCs towards the end of the reinvestment criteria when you go towards the end, there is that small paragraph, that section, which talks about maturity amendments, credit amendments, et cetera, et cetera. I'm not going to go into details on the language itself. If you want to know more about the language and how it works and the developments that we're seeing in the market today, stay on the line. And the next theme, Charlie is going to focus on this in a lot more detail and it's pretty interesting. But for now, I want to stop there and now bring Marta into the picture. So Marta, I want to bring you into the play here and focus on the loan landscape and specifically, how you seeing refinancing risk weigh in on metrics and in particular, the rating decisions that we're seeing in the corporate universe.

Thank you, Sandeep, and good afternoon, everyone. And the short answer is, I mean, so far, the impact of refinancing risk on rating action has actually been limited. Our rating actions to date have been more operating performance-driven. But we do see refinancing risk snowballing more rapidly as we head towards 2024. On the left-hand side, we show median leverage. And we can see that we are down from the pandemic peaks. So the portfolio in terms of leverage is sort of trending in the right direction to be prepared for refinancing. Focusing on the right-hand side, however, rate rises have caused a significant drop in our interest rate coverage ratios. So you can see that red line is about 1 turn different or lower than the sort of lightly gray shaded line. And this is compared to our expectations for the overall speculative grade universe back to 2021. This considers current hedging policies and incorporates the split between fixed and floating. The cushion is still healthy. But if we overlay repricing to current market conditions on the existing portfolio, that can cause a further 0.5 turn to a full turn drop in the interest coverage ratio, which unquestionably and definitely will highlight some downside rating potential for the overall portfolio. We can have the next slide. So why did I point to 2024 as a potential sort of runway risk? The good news is the maturity wall is actually clustered to '25 and '26 as you can see most clearly on the bottom-left chart. This gives issuers some time to rightsize their capital structures and come to market in an orderly fashion. The range-bound market technicals that we have provide a really constructive backdrop for amend-and-extend transaction. The good news is refinancing is a priority for all market participants. So this includes sponsors and issuers alike. And we are seeing increasingly preemptive actions taken by corporates to address their maturities, even '25 and '26 maturities, in an orderly fashion. Focusing on the B+ and below rated universe, which is sort of typically the CLO hunting ground, and that's on the right-hand side, telecoms, consumer goods, media and entertainment and health care are the top 4 sectors with refinancing risk by 2025 in terms of nominal debt amount rated. I wanted to sort of zero in on telecoms, for example. There are some issuers, like Altice France and Altice International have already started to address their sort of maturities for '25 and '26. They've done amend and extend during January and February periods. And then also, interestingly, zeroing on consumer goods, this is the second-largest sector with a maturity wall approaching in 2025. But it's also the sector where we have had the largest number of downgrades during 2022 predominantly because of cost-based pressures. And it will be interesting to see how that is handled and whether these companies "rightsize" the capital structure within the next 12 to 18 months period.

Marta, thanks a lot. So let's dive in a bit more, let's drill into a bit more specific. I put this slide together, a very colorful one, which I spent a long time putting together. But can we dive a little deeper specifically at the CLO level? So when we look at the loans or the corporate names here, these are some of the most common names that we see in CLOs. And we've listed there the number of CLOs they're in, which have again what I refer to as later maturity, something -- they have some form of a term loan or bond maturing between 2024 and 2025. Is there anything particular that you can tell us about these kind of names here?

Sure. I mean, the first thing I would say, it would have been a lot of a busier slide at the beginning of the year. But as I said, refinancings have been completed in the last sort of 3 or 4 months. This slide would have included, for example, strong BB credits, like INEOS and Action that have already addressed their maturities, and strong B+ ratings with massive cash flows, like MFG, for example, that you have here that is present in 216 CLOs. And Nouryon, Altice France and Altice International have also addressed their maturities. So some of these actually have even included a dividend distribution for shareholders. And we've seen in this sort of segment some rating upgrades recently that sort of point to the positive trajectory that I was mentioning that would arguably put them in a better place to refinance their capital structures. Here, on this slide, I can isolate Cognita, for example, as one of those candidates, and Hotelbeds. The last one was actually upgraded to B- only yesterday or the day before. So trends are sort of positive overall for some of these as we see.

And Marta, just a quick question to interrupt. But I noticed that Upfield, it appears to be the only consumer goods exposure in CLOs to a large extent. I mean, can you tell us something about Upfield there?

Of course. So Upfield was quite challenged during 2022. It was still sort of producing volume growth. But its cost base, wage pressures and supply chain issues weighed very heavily on the EBITDA and the ability to pass on price rises in a timely manner. So this caused a negative rating action to B-. However, by the end of the year, the Q3, Q4 results for this company was super strong and cash flow generative. And that put Upfield in a good position to launch in January a buyback of the term loan B and therefore further accelerating their sort of leverage trajectory path. So they've actually purchased back more than they announced. So EUR 250 million of TLB has been refinanced. And we do believe if the upward trajectory continues, this will sort of place Upfield in a good position to -- in a healthy position to reprice and extend its markets. But again, it's sort of -- the proof is going to be in the pudding. And it's all down to operating performance in the next 12 to 18 months. On the next slide, so this slide basically shows top 30 CLO holdings and credit metrics of those. So debt to EBITDA is compared to EBITDA interest. And I've isolated some of the names that are sort of high flow. But we could easily say that those are, on the bottom right-hand side, should be in the right position and have enough cushion to absorb higher cost of debt. But focusing a little bit on the top left-hand corner, those are the ones that will arguably sort of focus or sort of pose a more challenging aspect from their sort of existing capital structure, barring unforeseen positive influences on operating performance. So credits like Veritas, for example, or EG Group, we have them on negative outlook because operating performance is a bit sideways. And we don't see the capacity sufficient enough, absent other sort of activities, like I said, the utilization of cash to -- or sponsor support even to rightsize the capital structure and better position themselves to refinance the '25 and '26 maturities. I mean, notwithstanding credit fundamentals of the underlying, which is actually the key driver for rating action, we need markets to remain orderly as they have been, apart from the sort of occasional blip. The reinvestment period of CLOs is definitely a key considering factor that weighs negatively when assessing refinancing risk for second half of '23 and '24 overall. And any inability by CLOs to follow their investments opens the door to private or distressed credit entry into lending groups. This also increases the potential of a number of distressed exchanges as scheme arrangements or something similar may be the only recourse to push through desired debt maturity extension for issuers.

Fantastic. Marta, thank you so much for these insights. Right. We are running out of time, unfortunately. So I very quickly just wanted to finish off and, I guess, leave everyone in the audience with a concluding thought on this slide. It's slightly away from maturities but something just to think about. It's just a fact that CLOs are exiting their reinvestment period and they continue to season. And we have, I think, another 60 CLOs ending their reinvestment period at some point at the end of 2024. It does mean that at some point, CLO structures will start to delever. It means, of course, that at some point that equity returns for CLO equity investors will become somewhat less attractive at some point. And some CLOs may consider some form of liquidation of their CLOs. Again, obviously, no concern, it's going to happen at par plus accrued. But of course, what actually becomes more relevant in that picture as we go into next year is, for example, the price of CLO portfolios, right? Because at that point, you are thinking about equity NAVs and, for example, what would the price of your portfolio to make those loss returns for noteholders. And one of the analysis that we've done here, which we're going to expand on as we head to Global ABS is looking at, for example, the percentage of CLOs and the fixed rate positions that they have in their portfolios and the weighted average price of those portfolios at the same time. And you do see, for example, on the left-hand side, a distinct correlation between that. Again, you're saying, "We want some more information on that. Is there something to think about?" But we can provide more details as we head to Barcelona. But for now, that's it for the first theme, done. We hope you found it interesting. If you have any questions, please do write them in, and we will try to address them at the end. But for now, Andy, back over to you.

Okay. Thank you very much, Sandeep and Marta. And yes, as Sandeep mentioned, just to sort of plug it right now, Sandeep and I and some of the other analysts will be at Global ABS in a few days' time or a few weeks' time. So by all means, if you have any follow-ups, especially with Sandeep, around what he discussed there, then by all means, if you look at the speaker bio section of your console, you can see our bios and our e-mail addresses or our e-mail -- a link to our e-mail. So please get in touch. And we would be very glad to talk to you there. All right. We'll move then on to our next theme, which is, as I said at the beginning, is more around sort of what we're seeing or the latest things we're seeing in terms of features or documentation -- features in CLO documentation. I mean, Sandeep alluded to it a couple of times there. But clearly, with the environment the way it is regarding amend and extend, for example, then -- and also with credit concerns on the underlying loans, then obviously managers want to expand their abilities to sort of take different types of credits into the deals, which may not have been a focus previously. So that's one of the drivers behind it. But Charlie, over to you. You're going to talk us through several different features that we're seeing more and more of.

Thank you, Andy. Yes, now touching on CLO documentation. So we're going to go through four different topics: first one will be languages around maturity expansion in CLO documentation; interest reserve accounts for the first period will be our second topic; interest smoothing mechanism and how it has evolved over time; and finally, we'll touch on the recent innovation in workout and loss mitigation obligation language. So first topic is the maturity amendment. So as Sandeep said, this is a very topical subject. In CLO documentation, you can have three forms of maturity amendments. The most basic one, I'd say, is the cashless roll. This means simply rolling over into a new piece of asset from the same obligor. If you want to do this as a CLO manager, you will have to meet the eligibility criteria and the reinvestment criteria. And eligibility criteria and reinvestment criteria will prevent you from breaching WAL test. So this is one of the reasons why we see that from the list. Now what is more common and what is more topical are maturity amendment and credit amendment. So maturity amendments, the CLO manager can vote in favor of the maturity amendment for performing assets. I think that it doesn't breaches WAL test and it doesn't become long-dated. There could be potential buckets for breach of WAL tests. And we think this is how CLO managers use this flexibility. As Sandeep showed, there are some of them that are now breaching the WAL tests. Credit amendment is a more flexible term. It allows the manager not to be constrained at all by the WAL test. But this, we see it as a positive thing in some cases because it allows managers to avoid a situation where not extending the maturity of a potential obligor could potentially put the obligor in distress or in default. They could also give market value risk if you don't roll it over into the new piece of debt with a higher spread if you are locked into the previous piece of debt. So these resolutions are trying to cover those issues. Recently, we have received proposals where even if the assets will become long-dated, the manager could vote in favor of the maturity amendment. This is the newest proposal that we received. This could potentially go through as long as the manager sells the obligation within a certain number of days after the amendment. So this is a solution in order not to be exposed to market value risk at the maturity of the notes, which is the initial problem with long-dated assets. Now moving on to our next topic, which is the first period reserve account. So all CLOs have a first period reserve account. The main things are when you reach your closing date, you're not fully ramped up, therefore you will have a shortfall in interest proceeds to pay your notes on the first payment day. There's also a mismatch between the actual period of the asset and the payment of the notes, which is the one shown on the screen. So on the left side of the slide, you can see that we disclose a graph showing you the size of the first period reserve account for all CLO rated by S&P since 2022. You can see at the beginning of '22, they were all around EUR 2 million. And now since August '22, some of them have increased drastically their first period reserve account. Some of them have kept them around EUR 2 million. And the reason why this is the case is there's a higher funding cost for CLO managers. There's more pressure on the excess spread. There's a fixing lag on the rise of interest rate and the shortfall in the interest rate, which is not a problem only for the first 2 years. But because this -- because they're a bit more sensitive and it's usually longer, you will have an issue there. Assets resetting [indiscernible] so there is a graph on the right side showing you the issue. Usually, first periods are longer than the typical ones, due twice the size. And if you have an asset which is set in its payment frequency within that period, you could miss potentially the second payment date of this asset, which will [indiscernible] after the first payment date of the note of the CLOs, creating once again a shortfall. So what's interesting is that usually and historically, first period reserve accounts have been used to pay equity only in order to cover for the shortfall. But recently, we see a trustee report showing that the first period reserve accounts will be used to pay the note on -- will be used to pay interest on the rated notes, which is something unheard of. Our next topic is interest smoothing amount. So this is a graph showing you how interest smoothing mechanism work. You can have assets in CLOs paying less even the notes. Therefore, you need to smooth the proceeds between periods in order to cover for the potential shortfall. In this example, all of your semiannual paying asset, therefore paying less frequently than quarterly, pay on the first IPD. Therefore, you need to smooth half of it in order to cover any potential shortfall on the next IPD. On the left side, you can see that around 1/3 of assets in CLOs pay less than quarterly. Most of them pay semiannually, a few of them pay annually. Initially, the CLO manager has interest smoothing mechanism that will trigger as soon as the 5% bucket is breached. So you can see that now we are way, way above the 5% bucket. And this was an issue for CLO managers, especially for the equity holders. Because you could be in a position where you had a massive bucket, you had to smooth some of your interest proceed to the next period even though you are in a fixed spread to cover any potential shortfall. So this is the issue that is shown on the right of the slide with this graph. In order to overcome those issues, CLO managers have come up with a new type of language. And they are shown at the bottom of the slide. So on the left, you can see interest smoothing mechanism which won't be triggered for certain buckets as long as the interest coverage ratio is above a certain percentage. The newest language that you see is the one on the right, you -- it allows the manager not to smooth as long as your par value tests are passing and your IC tests are forward-looking, meaning looking at the next IPD, the one which could potentially experience a shortfall if at least [ 140% ], so you have a big cushion there. Now moving on to workout loans. So now moving on to workout loans or loss mitigation obligations. When workout loans and loss mitigation obligation came into place in 2020 from the U.S., the CLO manager was only allowed to buy workout loans using interest proceeds as long as they could pay for the interest on the rated notes at the next payment date. Then managers were allowed to buy using principal proceeds above the target par. Then this evolved to within the target par with some conditions. More recently, we've seen some changes. The first one is the market value transfer from the principal accounts to the interest accounts once you reclassify workout loan purchased using interest as a collateral debt obligation. So this concept is pretty interesting. Because it shows that for successful investments in workout using equity money, meaning using the interest, once you reclassify the workout loan as a collateral debt obligation, you can instantaneously pay back equity for what they provided you to invest in this workout. This wasn't the case before. You had to wait and sell the collateral debt obligation or wait until the maturity of it. More recently, we've seen some novelties. The par leakage for workout purchased within RTPB, so meaning once again, if you make an investment with principal proceeds and this investment is, let's say, a success and what you really get back from this investment is above the carrying value of your loss mitigation obligation, therefore you can release the excess to equity holders. This is an opportunity. Before you have to keep everything in the principal account, even if you made a gain on this loss mitigation obligation. Two more things. The ability to reinvest proceeds from workout obligation after the reinvestment period, subject to being classified as credit impaired. And the last one is the inclusion of workout loans in the fee basis calculation. The managers think -- they will be more prone to use workout loans in the future if there are some distressed scenarios. And they want to be [indiscernible] for managing those loans. That's it on CLO topics. Andy, back to you.

Okay. Many thanks, Charlie. So just a reminder, if you do have any questions about anything which Charlie has spoken about or Sandeep or Marta, then just enter them in the Q&A box and we'll come to those shortly. Okay. So on to our third topic then, which is around par. We published a commentary on this recently. It's probably in your resources box. Clearly, during the height of COVID-19 pandemic, we saw some significant price moves on the underlying loans in CLO portfolios. And that led to some sort of fluctuation in the par values in the portfolios. So that's been a challenge and as well as an opportunity, I guess, for managers. Shane, you looked into this in a lot of detail and, in particular, to what extent managers have been able to preserve par last year or even build it back up again. Tell us more.

Okay. Thanks, Andy. Yes. Hi, everyone. Good afternoon. I'm Shane Ryan. I'm Associate Director here in the EMEA Structured Finance team based in London. And as Andy mentioned, we're here today to talk about par and our recently published article, Is The Par Back in the European CLO Market? So please have a read and let us know any questions in the future. So 2022 was an interesting and active year in the European CLO market space with collateral managers being able to flex their muscles with the market volatility. Last year, we did do our first par article, looking at how the outbreak of COVID saw par losses across European CLOs. And through 2021, we saw the par was slowly being regained to where we are at the start of 2022, where this analysis starts off. So just the contents of the data we use, because we've already got quite a number of outreaches from researchers, investors and managers themselves, just to fully understand, in this par call, we took a sample of S&P-rated pre-issuance before 2022, so okay, issued 2021 and backwards but would have a full reinvestment period through 2022, so from January all the way through December. And then we wanted to analyze how par changed and how other key benchmarks would also change from the start of the year to the end of the year. Overall, that was -- ended up being 195 CLOs across 54 managers in the EMEA space. And again, just to clarify, we took all the trustee reports from January to December of 2022. And any calculations we did would be based off the end of month of that report. So for example, if we were looking at pricing or ratings, it will be -- if we're looking at a January report, it will be the data that we use from the end of January. So how did par go in 2022? If we first look at the chart on the left-hand side, we can -- and here, just to make things easier, we normalized all European CLOs to a target par, which we particularly see, of EUR 400 million. And we can see the light blue lines are par gains for each month. And the dark blue lines are par losses for each month. So we can see in April and September, par wasn't gained. However, cumulative over the year, we can see with regard to, on average, European CLOs gained par of EUR 850,000, an impressive par build indeed. And this obviously helps with CLOs to provide -- improving their overcollateralization and potential for excess spreads in transactions. Obviously, par build was just one clog in a CLO's armor. And we will touch on some of the other key benchmarks later. But obviously, for S&P, par is a hard clear enhancement, not taking into account any par leakage in CLOs and for our cash flow analysis. When talking about par build, we normally talk about two measurements, so ACB and ACPB. First, ACB is just the principal balance of the assets plus any principal proceeds that are available in the accounts. And using ACB, we saw 154 CLOs gained par through 2022, which was across 54 of the managers in our sample data, with a maximum gain of a European CLO of 1.19% of ACB. Another par measure we look at is ACPB. Here, it's the principal balance of non-risky assets plus haircuts applied to those riskier assets plus again principal proceeds sitting in accounts. The ACB in the bottom line is the OC numerator for the par test in the CLOs. Using ACPB, we saw 114 CROs gained par this time across 32 managers with an individual CLO of a max gain of 1.45%. Moving on to the chart on the right-hand side. We took the difference between target par and ACB. And again, the target -- the difference between target par and ACPB. This gives us a good measurement generally on how a CLO is performing. And it also shows that there is a steady measurements for the calculation of the par test. If we start in January 2022, again this does take into account a large volume of new issuance at the end of 2021. The deals were already above target par. And by the end of 2022, we can see that ACB gained against target par. There's 171 CLOs that gained par. And if we use the same measurement of ACPB against target par, by the end of the year, we saw 167 CLOs finished 2022 being above target par. So if 2022 was the year of par, what cost did it come at? If we take our SPWARF, which indicates the credit quality of the portfolios based on the S&P Ratings, we can see that the SPWARF was fairly steady in the last 2 years. So any negative rating actions that occurred were migrated against purchasing of higher-quality rating assets. But what we saw was that a gain of 1% in ACB would increase your SPWARF by 20 bps. So if we take our example of EUR 850,000 normalized gain in CLOs, on average, that will be a cost of 5 basis points on your SPWARF. When looking at [ ACPB ], a 1% decrease in par or in haircuts that would have been applied, we see 80 -- sorry, 60 basis points of increase in SPWARF. So again, if we normalize -- taking our normalized EUR 850,000 par gained, that would be a cost of 15 basis points to your SPWARF, which is not unsurprising, given the key metrics ACPB uses to haircut. Talking on those haircuts in the two charts at the bottom. If we look at CCC buckets and nonperforming buckets, we see that the CCC bucket on average has increased 1% across the year and then with European CLOs having an average CCC exposure of 5.5%. However, the main thing here is to show that now 1 in 5 CLOs have a CCC haircut being applied because they are now breaching their 7.5% CCC bucket, which is obviously quite an increase from the beginning of 2022 to the end of 2022. On defaults, on average, they tripled to just over 0.2%. And now we're seeing 1 in 3 CLOs having some form of default or nonperforming asset in their portfolio and applying haircuts across their ACPB. So what led to this par build? It appears to be down to the market values being available to the collateral manager, given the volatility in prices in 2022. So if we look again at the chart on the left-hand side, June 2020, we saw a fall in prices, given the outbreak of COVID gripping the world, but a steady recovery by the end of 2020 before a fairly stable 2021. 2022, however, has been a year of volatility and opportunities to trade in, given some assets are undervalued. Currently, CLOs exclude any market -- mark-to-market triggers or market value requirement, allowing CLOs take to advantage of good quality assets at opportunities priced. And based on the collateral manager's style, there's good opportunities to gain par, increase WAL and increase WAS, for example. Looking at the trading in 2022. Our data shows there's over EUR 5 billion worth of trades with EUR 2 billion being sold and EUR 3 billion purchased, highlighting the opportunities to buy at discount. In Q1, we saw a slight spike in trading, given the outbreak of the Russian-Ukraine conflict. But the key there is towards the end of the year, post U.K. mini budget, you saw almost 50% of the entire year's trades occurring. In CLO's reinvestment criteria, there's normally a par maintenance condition from the sale proceeds of the assets you're selling and to the assets you are purchasing. However, given these opportunity of market gains, CLOs can use these gains in a number of ways. You can have trade gains sent out to your interest principal prior to payment. You can reinvest with an increased par amount. You can reinvest in the same amount, any market value can be sent to your principal account for future purchases. And then you can also purchase premium credits to try improve the other benchmarks you may have. As we see with all these options in price movements, collateral managers were kept very busy in 2022. So is par all CLOs need? As we discussed, par is just one part of CLOs. And each CLO is different and made up differently in its structure and its documentation. CLO managers may have different styles based off individual CLOs or all the CLOs they have on their book. But depending on where the CLO is in its lifecycle, there could be different requirements such as seasoning, arbitrage or equity returns. In our reports, we do provide a peer comparison against managers from the end of January 2022 until -- and look at what changed by the end of the year from December. And this just allowed us to analyze the different managers and how they take different approaches. Again, as we said, not all CLO is the same. However, given the opportunities in 2022, we have seen increase in WAS and increase in WALs, meaning that CLOs may be around longer than noteholders had imagined pre 2022. And with that, please, if you have any questions on the article, you can reach out. It is data-heavy, but we're more than happy to get into calls or discuss any findings from the articles. And with that, Andy, I'll hand it back to you.

Okay. Great. Thank you very much, Shane. And that then brings us to the end of our sort of prepared remarks. We've got 10 minutes left also for Q&A. We have got some questions that have come in as well as some that were pre-submitted with your registrations. [Operator Instructions] So let's get going and see how many of these we can do. I'll start with a relatively easy one. We've got a question here around just what is our projection for European speculative-grade default rates, in other words, the corporate default rates. And I think it's in reference to a slide I showed earlier, which is this one on the right here. So the yellow line is the European spec-grade corporate default rate and the dotted line is how it goes up in our forecast. So just to put a number on that, which may not be entirely clear from the chart, we've recently published a forecast going to the end of Q1 2024, where it's 3.6% in our base case. So just to give you some reference point, the sort of 15-year average across that chart is about 2.6%. So yes, we're already slightly above that average. And we expect it to go a little bit higher. So hopefully, that answers that question. Next up, we -- let's see now. I think, Sandeep, we'll come to you and just start with a question here that we had pre-submitted, which was will CLO documents stop allowing reinvestments after the end of the reinvestment period?

The short answer is no, they don't, not necessarily. CLOs can still reinvest proceeds as long as it's a particular type. So for example, credit-improved, credit-impaired and unscheduled, to some extent, can be reinvested. It's just that the requirement to reinvest, the hurdle, it's set much higher. And that's when, again I'm getting into the nitty-gritty here, we see one-touch WAL test becoming ever more important in today's environment. Charlie mentioned that there are some CLOs out there that are now post-reinvestment period allowed to reinvest workout obligations, which we've never seen before, as long as their cluster is credit-impaired. So short answer is no, they're not stopped from reinvesting. But the hurdle and the requirements to reinvest is set much higher.