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Analysis CLOs
Reset frenzy set to ease — for now
by Shant Fabricatorian
The majority of deals from 2022 and 2033 that could be reset have been, so activity is likely to slow. But 2024 was a busy year for issuance and deals from then may bring a new surge in 2026
Resets have helped fuel the blazing pace of CLO issuance in 2025 and the record streak of last year. But these deals that refresh old vehicles may be running out of steam.
September has proved another reset-heavy month, in a year where reset issuance has increased some 7% year-to-date in the US, and a massive 111% in Europe for the same time period. Indeed, last month saw a record monthly volume of resets of private credit (also known as middle market) CLOs in the US.
7
bn
€
Value of likely European reset supply for Q4, according to Bank of America
“This has been another record year for us with 11 transactions so far. And there is still more to do — with the tightening cost of capital, market participants still have plenty of resets to work on through the end of the year,” said Bhavin Patel, chief investment officer at Apollo’s Redding Ridge Europe.
September issuance
Rates in 2022-23 led to resets in 2025
The rush of resets can partly be attributed to the pain the CLO market experienced in 2022 and 2023, when soaring inflation sent global central banks — including the Federal Reserve and the European Central Bank — hiking their policy rates. CLO spreads flared wider and issuance slowed.
A confluence of different-vintage resets have also come together to power this year’s reset wave, according to David Nochimowski, global head of CLO and ABS strategy at BNP Paribas. “The 2022 and 2023 vintages with high coupons — they’re natural candidates for resets,” he said. “On top of that, you had many post-reinvestment, deleveraging deals, mostly from 2018. And there was also a third group — the 2021 vintage, which started to be in the money in the US, but is not yet so in Europe.”
But there are only so many deals that are out of their call lock period or have viable spread levels for a reset at any given time. (A reduction of 20bps in the weighted average cost of capital is considered a good rule of thumb that covers the cost of a reset.) And the demand for paper has seen the majority of viable deals already reset over the past 18 months in Europe and the past two years in the US. Managers need to carefully consider whether a significant number of 2021-vintage deals make sense for resetting.
CLO resets 2023-25 ($bn)
That means the strength of repricing activity next year will depend significantly on the 2021 vintage, said Matthias Neugebauer, managing director, head of EMEA structured credit at Fitch Ratings. But it’s not yet clear how that will pan out.
“We do not believe the decision to reset the 2021 vintage is as black and white as it is for the 2022-23 deals at the end of their non-call periods,” he said. “At the end of Q1 next year, resets of the post-2021 deals will probably taper off very quickly. But what happens to the 2021s?”
The answer is likely to come down to a case-by-case assessment. “Mezz and junior tranches have tightened since the deals were done in 2021, so there would be savings on that side,” Neugebauer said. “Triple A is wider, clearly. But perhaps the manager is expecting to lock in the mezz and juniors right now with a reset at the end of the reinvestment period, rather than to continue to reinvest after the end of the reinvestment period — which is what managers did with the 2019 and earlier vintages — and then hope to do a refi on the senior paper at a later date. Those considerations play in.”
Another wave may arrive next year
Nochimowski expects a large proportion of the reset volume in the US next year to be deals from 2024, an active year for issuance. “I’m not too worried about a steep decline in reset and refi activity there, because you have this impending wave, although it may be more concentrated toward the latter half of the year,” he said.
Equally, Europe might surprise, said Nochimowski. “While 2024 was a very active year of repricing activity in 2024 in the US, it was less active in Europe,” he said. “I think we could see in Europe more post-RP deals being reset — there is still much to happen. So we could still see high volumes happening there as part of the ‘catch-up’ with the US, because of their differing cycles. That could remain in play through the first half of next year.”
7
%
Increase in reset issuance year-to-date in the US
In early October, Bank of America research upped its forecast for European issuance this year, despite expecting a slowdown in new deals for the remainder of the year. The team said there are obvious reset candidates with some EUR 7bn of likely reset supply for the fourth quarter, though some of it might spill into next year.
From an investor standpoint, investing in older CLOs can be a way to manage the overlap of the underlying assets during the ramp period, said Andrew Lennox, senior portfolio manager at Federated Hermes.
“One way to manage that as an investor is to invest in older CLOs — so buying a reset — as well as the new issues,” he said. “That means you’ve got a different mix of the underlying assets, and you’re not going to end up with that 90% overlap of assets. That’s been important to us to be able to have that.”
111
%
Increase in reset issuance year-to-date in Europe
European investors also need to keep an eye on tiering, which is developing across the board in European triple As, but particularly for resets, said Redding Ridge’s Patel. “The tiering is dependent on how much portfolios have been cleaned up and a reflection of strong risk management over the reinvestment period by the manager,” he said.
But regardless of whether the current record pace is maintained or slows down, any changes in repricing levels are unlikely to have a material effect on overall spreads. The key determinant for that is whether the new issue market reopens, said BNPP’s Nochimowski.
