CLOs: More Ways to Find Value

CLOs offer attractive floating-rate income and structural protection, but value is increasingly differentiated across borrowers, markets, managers and capital-structure positions.

• Strong demand and limited new-loan supply have supported CLO valuations, while modest spread widening late in the third quarter of 2026 may create more attractive entry points.
• Leveraged-loan fundamentals remain healthy, with most borrowers showing positive revenue and EBITDA growth and improving leverage, but rising input costs, higher interest expense and 2028–2029 maturities could expose weaker credits.
• AI is increasing dispersion in software, business services and health-care technology; company-specific analysis is needed because the effects on revenue, margins and competitive positioning remain difficult to quantify.
• CLO ETF demand is growing, with the U.S. market exceeding $60 billion and the European market reaching approximately $2 billion as of September 2026; secondary-market spread widening is also improving relative-value comparisons.
• AAA and AA tranches retain strong credit enhancement and downside protection, while mezzanine tranches may offer opportunities if spreads widen; updated U.S. insurance capital rules are also encouraging junior single-A structures.

Takeaway: Investors should look beyond headline ratings and compare collateral quality, manager, vintage, structure and region, while considering expanding segments such as private-credit, infrastructure, hybrid and commercial-real-estate CLOs.