CLO Managers Sold Peraton Ahead of Triple-C Downgrade

Reporting: Chloe Wang
Moody’s Investors Service downgraded Peraton by two notches to Caa2 from B3 with a negative outlook yesterday, May 12, following Fitch Ratings’ earlier one-notch downgrade to CCC+ from B-. Octus, formerly Reorg, reported that the downgrade affects 102 U.S. CLO managers with $3.2 billion in total holdings.

Despite Peraton now ranking as the third-largest loan exposure for U.S. CLOs, managers are largely unfazed by its triple-C downgrade.

Peraton’s $6.2 billion senior secured first lien term loan due 2028 has increased in price to 87.48 from 86.29 over the past week, and its $300 million second lien term loan due 2029 has dropped to 74.88 from 75.81 over the past week, according to Solve.

“It’s not shocking when you have a defense contractor or a business that relies on government contracts,” said Jeremy Burton, portfolio manager for U.S. high yield and leveraged loans at PineBridge.

Burton described Peraton’s situation as “very narrow,” noting, “It’s a very specific situation in a specific subsector. It’s no secret that these companies are kind of under target by DOGE.”

Kevin Wolfson, portfolio manager for U.S. leveraged loans and CLO management at PineBridge, said that CLO managers had already trimmed exposure to Peraton.

“CLO managers have reduced exposure to the defense sector, and they are in a good starting place even with an increase in downgrades,” Wolfson added.

According to Bank of America research, aerospace and defense accounts for 4.1% of total CLO exposure. The sector has seen an average price decline of 2.3%, with 18% of loans falling more than 5%, and another 5% of loans dropping more than 10%.

S&P Global Ratings data shows 2.49% of CLO assets are allocated to the aerospace and defense sector, with a weighted average spread of 3.1%. Of those, 5.31% carry a negative outlook and 2.81% are on negative credit watch.

Another aerospace and defense company, Amentum, has approximately $2.18 billion in CLO exposure across 105 U.S. managers, according to Octus’ CLO holdings data. Despite sectorwide pressures, Amentum remains stable, rated B by S&P and B1 by Moody’s. Its loan price has risen from 98.41 to 99.95 over the past month, according to Solve.

“I think CLO structures are quite flexible,” Wolfson said. “It’s an opportunity for managers to really focus on risk mitigation and maybe reducing risks in certain credits, moving up in quality, or taking the opportunity of volatility to shift into better credits.”