CLOs: More Ways to Find Value

Melissa Ricco
Head of Structured Credit

Meredith Lynch, CFA
Managing Director, High Yield

CLOs continue to offer attractive floating-rate income and meaningful structural protections, supported by resilient loan fundamentals and strong investor demand. But beneath that backdrop, opportunities are shifting across borrowers, markets and the capital structure.

Strong demand and limited new loan supply continue to support CLO valuations, while the floating-rate nature of the asset class has contributed to performance in a higher-rate environment. Although spreads widened modestly toward the end of the third quarter, the move followed an extended period of stability and tightening, bringing potentially more attractive entry points into view.

Across the market, CLOs continue to offer attractive carry and diversification. Senior tranches remain particularly compelling, while periods of volatility are creating select opportunities further down the capital structure.

Fundamentals Remain Healthy

Leveraged loan fundamentals remain healthy overall:

• Most borrowers continue to generate positive revenue and EBITDA growth, and leverage has improved year over year.
• Broad deterioration has so far remained contained, with defaults still concentrated among a relatively small group of weaker borrowers.

However, signs of deceleration are emerging. Rising input costs may start to pressure margins, while elevated interest expense could constrain free cash flow for weaker borrowers.

Maturities are also drawing a clearer line between stronger and weaker credits. Many borrowers have successfully extended their maturity profiles, but companies with weaker cash flows, higher leverage or less robust business models may face a higher hurdle as the market turns its attention to 2028 and 2029. The result is greater price dispersion, even among companies in the same sector.

AI is Widening the Lens on Disruption Risk

Software remains a closely watched area of the loan market. Following significant volatility earlier in the year, performance improved during the third quarter as investors began distinguishing more clearly between companies that may benefit from AI and those that may face greater disruption risk.

It’s still too early to establish definitive winners and losers, given the difficulty of quantifying potential effects on revenue, margins and competitive positioning. Software therefore remains investable, but the range of possible outcomes calls for company-specific analysis rather than broad conclusions about the sector.

Beyond software, certain business services and health care technology companies have experienced AI-related volatility.

For CLO investors, the key question is not necessarily how much technology exposure a portfolio contains, but whether managers have a credible framework for:

• Identifying disruption risk
• Distinguishing between durable and potentially vulnerable credits
• Adjusting the portfolio as the effects of AI become clearer

Another area to watch is AI infrastructure financing. Data center and related issuance has so far been concentrated primarily in the investment grade and high yield bond markets, but the broadly syndicated loan market could play a larger role as financing needs expand. This could ultimately introduce loans with different cash flow profiles, construction risks and collateral considerations into CLO portfolios.

The Technical Backdrop is Still Strong

Technical conditions remain strong in both the U.S. and Europe. Demand is broad-based and remains supported by attractive carry and low duration relative to comparably rated fixed income products. CLO ETFs are a growing source of that demand, with the market now exceeding $60 billion in the U.S. and approximately $2 billion in Europe.¹

Primary CLO activity remains robust, although much of the recent volume has consisted of refinancings, repricings and resets. Recent spread widening has also improved relative value in the secondary market, giving investors greater flexibility to compare opportunities across primary and secondary markets, as well as across managers, vintages and regions.

Figure 1: Demand Remains Strong, Including from CLO ETF ($ millions)  

Source: BofA Global Research. As of September 30, 2026.

Senior CLOs Look Compelling

Senior CLO tranches continue to offer an attractive combination of carry and downside protection. AAA and AA tranches benefit from meaningful credit enhancement and remain relatively insulated from idiosyncratic weakness in underlying loan portfolios. That combination is particularly valuable amid continued economic, policy and geopolitical uncertainty.

Further down the capital structure, mezzanine spreads could widen if higher rates place additional pressure on riskier portfolios, potentially creating opportunities but also increasing the importance of careful collateral analysis. More broadly, CLOs continue to offer a notable spread pickup relative to similarly rated corporate bonds and CMBS (Figure 2).

Figure 2: CLOs Can Offer a Notable Spread Advantage in Today’s Market

Sources: J.P. Morgan US CLO Spreads; BofA Global Research Jumbo Nonagency Spreads; Bloomberg US Aggregate Index –CMBS & Corporate IG; Bloomberg US Corporate High Yield Index; S&P UBS Leveraged Loan Index as of September 30, 2026. Note: Represents New Issue CLO Spreads.

Relative value can also vary considerably across deals. Manager quality, portfolio composition, vintage and structural protections can all influence the risk and compensation offered, even among similarly rated tranches. Looking beyond the headline rating therefore remains essential when comparing opportunities.

A New Consideration for Insurance Investors

Updated NAIC risk-based capital factors are expected to improve the capital treatment of higher-rated CLO tranches held by U.S. life insurers, while increasing charges for tranches rated BBB+ and below. These changes are already contributing to structural innovations in the new-issue CLO market, most notably the emergence of junior single-A tranches, which can offer additional spread over more senior single-A tranches without requiring insurers to step down into BBB risk.

Pricing will ultimately determine whether these tranches offer compelling value. But the change gives insurance investors another reason to compare the structural position, subordination and compensation within the same broad rating category.

An Expanding Market

The opportunity set extends beyond CLOs backed by traditional broadly syndicated corporate loans. Private credit CLOs continue to gain traction, infrastructure CLOs are developing from a small base, and hybrid structures combining private credit and broadly syndicated loans are generating increased interest, particularly in Europe. Commercial real estate CLOs represent another established, if more specialized, application of the structure.

Each segment offers a different underlying exposure, but the common thread is a familiar structure that can provide investors with tranched access to actively managed pools of credit.

The Bottom Line

The CLO market is becoming broader and more differentiated at the same time—giving investors more ways to find value, but also more distinctions to make across borrowers, managers, structures and individual tranches.

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1. Sources: J.P. Morgan. As of September 21, 2026 (U.S.); BofA. As of September 30, 2026 (Europe).

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