Asset-Backed Securities: Complementing CLO BB Portfolios

A combination of BB-rated ABS and CLO BBs can produce more resilient structured-credit exposure than a CLO BB portfolio alone.

• CLO BBs concentrate exposure to U.S. leveraged-loan defaults, collateral-manager decisions and overcollateralization tests, whereas ABS cash flows are linked to consumers, equipment leases, receivables and other contractual real assets.
• The non-real-estate ABS market is approximately $1.6 trillion and includes consumer, commercial and equipment, and esoteric or digital-infrastructure subsectors.
• ABS generally trades tighter than CLO BBs but has a shorter weighted average life and monthly principal amortization, which can reduce mark-to-market risk and limit exposure to any individual loan default.
• The risks diverged in Q1 2026: software and AI-disruption fears widened CLO BBs by about 188 basis points, while the move was attributed to corporate-loan tail risk rather than consumer credit.
• CLO BB coupons are floating-rate and track SOFR, while fixed-rate ABS can preserve income when rates fall; ABS also diversifies exposure away from CLO collateral managers toward originators and servicers.

Takeaway: ABS BBs do not replace CLO BBs' superior yield per rating, but a blended portfolio could provide steadier cash flow, faster principal repayment and liquidity to buy CLOs during spread widening, subject to consumer-credit, servicing and structural risks.