On February 20th, S&P downgraded Vibrantz Technologies to default. Within 2 weeks they upgraded Vibrantz to CCC. This is part of a pattern I highlighted in my recent article, examing how ratings agencies were quickly upgrading defaulted loans to CCC allowing gaming of the CLO cashflow rules.

In a typical CLO test a CCC loan is given full value, while a defaulted loan is severely haircut, hence the need for a rapid upgrade.

This case, perhaps more egregious, adds to the evidence I provided in my article. 

Among recent leveraged loan (LL) defaults, Vibrantz looms large. According to Fitch, "Vibrantz ... was the most widely held defaulted issuer, appearing in 29% of Fitch-rated U.S. broadly syndicated loan (BSL) CLOs."

Despite the default, the CLOs likely won't see a Vibrantz default in the investor report, because the rating quickly escaped default status and was upgraded to CCC. 

S&P to the Rescue

Before the default ink was dry, S&P upgraded Vibrantz to CCC thereby avoiding the negative CLO impact. 

Below, I unpack S&P's dubious rationale line by line. 
 
No "Clarity"

"We do not yet have clarity on Vibrantz's final capital structure, go-forward credit profile, and financial policies at this stage of the exchange transactions."

Rod Note: How can S&P upgrade with such critical information missing? No capital structure, no credit profile, no financial policies should mean NO UPGRADE. The ratings agencies who are super cautious and painfully slow to downgrade seem to act like a cowboy at the OK Corral ready to shoot first and ask questions later when it comes to upgrading defaulted LLs. 

We Apply our Top-Secret "Section X" of our Ratings Methodology: Wishful Thinking.

"We estimate the transactions will improve the company's near-term liquidity position because of new money raised, absence of scheduled amortization on new debt, and maturity extensions until 2030." 

Translation: We really don't have enough information to forecast, but we will anyway. 

Our Upgrade Likely Won't Last Long

"However, we expect interest coverage ratios to remain weak and leverage unsustainable."

Translation: Key word: "unsustainable." A word I see frequently in these Default to CCC ratings. It serves to warn that the upgrade likely won't stick. But for now, the bankers and CLO community are happy.

Distressed Exchanges Have a High Redefault Rate

Most of the data available reveals that Distressed Exchanges are destined for 
redefault. Distressed exchanges are prevalent in both the Leveraged Loan and Private Credit Market with DBRS noting that in February 16 out of 17 Private Credit defaults were via Distressed Exchanges.