Listen to the latest episode of Credit Exchange with Lisa Lee
Published in London & New York
10 Queen Street Place, London
1345 Avenue of the Americas, New York
Creditflux is an
company
© Creditflux Ltd 2025. All rights reserved. Available by subscription only.
Opinion CLOs
BSL markets again demonstrated their fundamental resilience
by Dagmara Michalczuk
Dagmara Michalczuk
Co-chief investment officer
Tetragon Credit Partners
In 2025, CLO issuance remained strong, despite LMEs, defaults and tariffs. Next year should be similar, if managers don’t become complacent
December naturally invites reflection — it’s a chance to look back on the past 12 months and ahead to the coming year. It’s also an opportunity to take stock of what worked, what didn’t, and what the markets taught us. Viewed through this lens, several themes stand out for the loan and CLO markets.
First, 2025 served as another successful stress test for global loans and CLOs. Despite the US tariff shock and significant macro uncertainty, broadly syndicated loan markets demonstrated fundamental resilience, with weakness confined to the lowest-quality borrowers and select sectors. CLO issuance remained robust, continuing at a record pace even as equity arbitrage tightened later in the year, supported in large part by captive equity capital. As of the end of November, US YTD new issuance reached USD 192bn and European issuance hit EUR 56bn, exceeding comparable 2024 levels, which were the previous records in both regions.
New investors and increased trading
Second, the CLO asset class continues to mature and broaden. Investor access is expanding through the proliferation of CLO debt ETFs in the US and, more recently, in Europe, alongside greater participation from mutual funds and money market funds. The market is attracting new institutional and retail investors drawn to the enhanced relative returns available in CLO securities. Secondary liquidity has also improved as CLOs become more integrated into mainstream fixed-income strategies. Both TRACE and BWIC trading volumes in 2025 are running ahead of last year, and the market has remained orderly even during risk-off periods. Finally, a steady stream of manager launches underscores the growing appeal of the asset class, despite the prevailing view that scale and track record are critical for long-term success.
Third, the AI revolution is accelerating technological change across the economy and reshaping business models. I believe comprehensive, ongoing analysis of AI-related risks and opportunities, paired with thoughtful diversification around those factors, will become increasingly important in the years ahead. This systemic shift will also require companies and investors to adopt faster and more adaptive decision-making frameworks.
While some business models may be disrupted if they fail to evolve, others will benefit from AI-driven productivity gains and quality improvements. Forming accurate early views on these dynamics will be key for avoiding losses and maximising total returns in loans and CLOs, particularly for equity and mezzanine investors.
Fourth, 2025 has humbled many credit investors. The rapid unravelling of First Brands underscored how quickly markets can react to adverse news. Its swift fall from performing to defaulted also reinforced the importance of disciplined credit selection, dynamic risk management and a healthy degree of scepticism toward performance that appears too good to be true. While many elements of this case were idiosyncratic, the episode highlights the complacency risks that can emerge late in an extended credit cycle.
Fifth, the LME and restructuring landscape is evolving rapidly, with both encouraging and concerning developments. Recent court decisions reinforcing equitable treatment of pari passu lenders (for example, Serta Simmons and ConvergeOne) provide welcome clarity. At the same time, the antitrust action filed by Altice USA/Optimum against creditors which formed a “cooperation agreement” illustrates that the balance of power between borrowers and lenders remains contested. LMEs added a new dimension to loan risk over the past decade and will continue to play a critical role in shaping the risk/reward proposition of the asset class over the coming years.
Issuance should remain substantial in 2026
This brings us to the outlook for 2026. Consensus macro forecasts point to modest US and global growth, supported by lower interest rates, greater visibility on fiscal and monetary policy, and continued AI-driven capital investment. Against this backdrop, US default and restructuring volumes are expected to stabilise and decline slightly from 2025 levels. CLO and loan issuance should also remain substantial, roughly in line with this year’s volumes, as the cycle extends further. However, with loan and CLO liability spreads near historic lows, the margin for error is thin. Discipline, diversification and a rigorous approach to risk will be essential to successful CLO investing in 2026.
