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 2026. All rights reserved. Available by subscription only.
News Analysis
Innovation and uncertainty lead to widening dispersion
by Kathryn Gaw
The global CLO market is adapting to the uncertainty of the macro environment by leaning into innovation. For example, a tougher arb environment has led some CLO equity investors to turn towards tranche investing. Meanwhile, a growing cohort of managers have been raising funds for captive CLO equity funds. All this is widening dispersion in performance.
Where once CLO equity returns were comfortably and reliably in the high double digits, over the past few months, deals have been circulating on the primary market offering as little as 9% for CLO equity positions.
Loans tighten faster
“Arbitrage has stayed under pressure as underlying loan spreads have tightened faster than liability spreads,” said Gabriele Gramazio, a managing director in KBRA’s structured credit ratings group. “The market also remains bifurcated, with weaker credits trading at significant discounts to par, while higher-quality loans continue to trade above par, limiting managers’ flexibility.”
This has already led to some dispersion among managers in both the US and Europe, and most industry insiders expect the trend to continue across the second half of the year.
“We expect manager performance to show increased dispersion, with a more pronounced difference between stronger and weaker performers as volatility remains a defining feature of the market,” said Eddie O’Neill, co-head of global leveraged credit at KKR.
In hindsight, dispersion began in earnest during the software sell-off in the first quarter of the year. Some managers were able to lower their software exposure quickly, while others benefited from having already taken conservative positions on software loans. Others were able to see value in the sector and snapped up cheaper loans before hastily issuing print-and-sprint deals.
Arbitrage has stayed under pressure
Gabriele Gramazio
Managing director
KBRA
For Apollo, 2026 presented an opportunity to shake things up by launching a new type of vehicle called AMAPS, which incorporates many elements of a traditional BSL CLO, but with a large single A tranche and a thicker equity allocation. Creditflux has reported that several large CLO managers are now looking into creating their own versions of the AMAPS vehicle, in a sign that innovation is becoming ever-more important in an environment where spreads remain stubbornly tight and equity returns are falling.
Looking ahead to the second half of the year, concerns remain around the possibility of higher defaults. However, Lauren Basmadjian, partner and global head of liquid credit at Carlyle, noted that both LMEs and defaults have actually declined from their December 2024 peak. She doesn’t expect to see a dramatic uptick in the year ahead.
“We think recent loan defaults were largely well-telegraphed and reflected in trading levels, but I could see the market default rate potentially increasing by approximately 1% over the next 6-12 months,” she said.
Ryan Olsen, portfolio manager for CLO tranche investing at Napier Park Global Capital, echoes a wider industry view that prudent portfolio management can offset losses. “I don’t think there’s going to be a broad systemic deterioration in credit quality or a large increase in defaults or downgrades,” he said.
The second half of the year is likely to see the European CLO market soar, according to multiple industry sources. Issuance for the region reached a record for any first half year, according to Creditflux data.
More than a dozen new managers are expected to enter the European market in the near future — a combination of established US-based names, Europe-based private credit houses, and entirely new shops. By all accounts, the European CLO pipeline is strong, while the continent’s nascent private credit CLO market is picking up steam, aided by the imminent arrival of market-first hybrid deals, which combine both BSL and private credit elements.
Growing interest in PC CLOs
In the US, the expectation is for steady BSL issuance across the second half of the year, and growing investor interest in private credit CLO opportunities.
PC CLO issuers have noted that despite the onslaught of negative headlines about private credit funds, PC CLOs have remained popular with investors, with new issues reaching near-record volumes for the first half of the year, according to Creditflux data.
“We continue to see healthy new transaction volumes and believe this will lead to more PC CLO formation,” said Michael Boyle, a partner in Bain Capital’s Private Credit Group.
Looking ahead, asset selection and portfolio management will be key. The popularity of captive CLO equity funds is likely to continue, with at least two such funds being put together at the time of writing. Managers have spent the year so far learning how to navigate uncertainty and where to find value.
