The mood was cloudier for the US CLO market at FTLive’s ABS East this week, although the weather outside was as bright and toasty as you would expect for Miami in October.

“The tone of this conference has been the most bearish I’ve seen, maybe ever,” a CLO investor said on a panel. A recent nervous bout of volatility saw loans trade down in the past few weeks, as the downgrades of names like First Brands and Tricolor brought an unpleasant shadow to what has otherwise been a period of optimism for CLOs and more broadly, asset-backed securities.

“Everything is priced to perfection but nothing can go wrong. It really does seem like something is brewing,” another CLO investor said on a panel. “What is coming ahead?” Panelists ticked off the usual suspects: geopolitical risk, tariffs, or the more recent AI-risk that has caused some chop in the market.

An audience member punctuated the uneasy quiet of the room with a question that brought some relief: “What if it’s aliens?”

Below are nine CLO themes we expand on from the conference.

1. Relative value weighed between CLOs and related products

CLOs still dominated the conference agenda compared to several years ago, according to one attendee, but excitement over CLOs was tempered and investors looked to other products in nearby corners of the ABS markets.

The polling of attendees at an earlier panel on 20 October, the first full conference day, reflected a mellowed temperament around CLOs as a majority of respondents in the room, when asked where they thought US BSL triple-A spreads would go from here, said they expected at least moderate widening (50%) or significant widening (8%) compared to only 42% predicting spreads would remain roughly the same and nobody believing they would tighten significantly.

On the other hand, another poll had the room still optimistic on US BSL CLO new issuance, with 50% expecting $175bn-$200bn and a bullish 17% predicting over $200bn for the year, by the end of 2025.

SRTs, CRTs, CRE CLOs, CFOs, rated feeders, and even CDOs were among the related asset classes that got a turn in the spotlight and featured in conversations on their relative value against CLOs proper.

CLOs fall between GSE CRTs (government-sponsored enterprise credit risk transfer) and fund finance in regards to risk and return, one panelist said. The structuring of CLOs, which partly translates to the product’s duration and convexity, is at a medium level between CRTs and fund finance.

Comparatively, CFOs expose much less visibility into the underlying assets of a fund, and people need to focus on where they sit in the capital stack, the structure of the securitization, and how that will impact particular tranches, in order to underwrite to a broader set of outcomes, one panelist said.

Meanwhile, rated feeder funds have a little better transparency and are much more customizable for insurance investors to look at, according to another panelist. “You can attach that to a lot of different things.”

One panelist, an SRT issuer, noted that they had begun to structure their SRTs in a way that echoes CRTs and CLOs, reflecting a broader theme of convergence among structured products discussed at the conference.

“We are always looking to tap these various markets in whatever way is most efficient and get to the best cost,” the SRT issuer said. “Over time, our structures on the SRT side will move towards the CRT market and CLO market. I would expect to see some level of standardization, while at some time respecting why some of these markets still need to remain private.”

2. Infestation, or a lone roach?

“How many cockroaches have you found?” someone asked a rating agency representative. The speaker responded that so far there had been “only one” which everyone knows about, presumably referring to auto parts seller First Brands. Read our analysis here of the CLO exposure to First Brands, as it went from a single-B name to triple-C and then fell into bankruptcy.

Talk at the conference diverged between those expecting more roaches and those insisting that there was nothing to see here, folks. If we had a dime for every time someone insisted First Brands was an “idiosyncratic” credit event, we’d be able to set up a family office.

“One or 2 events will pop up and people will say, how many cockroaches? I’m not seeing too much crawling out of the carpet yet,” a CLO trader said in one panel.

On the other hand, as another panelist pointed out, the collapses of Tricolor and First Brands were produced by a broader environment of lax underwriting standards, brought on by too much money chasing too few assets — which could mean more trouble ahead.

Generally, investors maintained a resolute weariness in their assessment of the situation. While there was talk of retail money, via CLO ETFs, potentially selling off as we’ve already seen a bit of this week, the traditional players are expected to dig in and stick around for any volatility ahead, and even to hope for it so they can get a break on CLO spreads (and managers, on loan prices of course).

“Yes it’s cockroaches, but termites haven’t eaten the foundation yet,” one middle-market CLO investor put it, adding later, “What I can say is to the god of CLOs, (give us) a selloff in triple-As!”

Another, who joined in expressing a desire for increased volatility to give them discounts, put it more baldly. “My boss used to say, if you’re worried about CLO triple-As failing, buy arms.”

3. Time for transparency

Given that concerns over credit performance loomed large over the discussions, several speakers raised the desire for greater transparency into the private markets.

Speakers emphasized the importance of manager transparency which, in the middle market space, is less about public loan prices and portfolio, but more about the fund manager’s process.

“It feels like credit risk has been fairly benign,” said one panelist, adding that credit risks differ substantially between public and private markets. “Since the end of 2022, most liquidity-constrained, smaller types of borrowers have exhibited much higher credit risk relative to the larger, more liquid-rated parts of the market.”

“There have been strong winds at our backs from the performance and the strong growth of the economy that have helped keep actual credit events low. On the other hand, there is potentially a pile of dry kindling that is exposed to softening of growth,” the speaker added. “First Brands was a great example where that lack of transparency prevented any sort of bottom-up or fundamental assessment of credit risk that wasn't tied to a ratings-based assessment.”

4. MM CLOs draw BSL investor eyes

Despite greater competition with the returning banks this year, demand for private credit CLOs remains robust amid continued convergence with BSL CLOs.

This is despite the fact deal volume contracted in both count and value in the last quarter, after a record 2024 level of issuance, which was "disappointing", according to a speaker. There had been high hopes for the new administration in 2025, but those burst after several market disruptions caused delay in M&As, and deal activities came down after the Liberation Day, the speaker added.

However, middle market CLOs issuance still went up by 13% year-over-year and represents 21% of total issuance of the CLO market, according to data revealed at one panel. Triple-As currently around SOFR+140bps in the middle market space for tier-one managers, against around S+120bps in BSL, meaning the basis has become quite tight, and there is relatively little manager tiering amongst MM CLO managers. However, a panelist said, as credit cycles play out the tiering and differentiation should be expected to widen.

About 90 percent of managers are using middle market CLOs as leverage for an underlying fund complex, according to one speaker. A CLO investor from an insurance company said MM CLO double-As are attractive if taking the liquidity premium, and investors are more comfortable going down the capital stack if they already have a private relationship with the manager.

MM CLOs also offer higher par subordination and promise stronger credit underwriting, although one MM CLO investor mentioned cov-lite “drifting” and noted having to push back on MM CLO managers dismissing loan covenants. “We like the covenants,” the investor said.

There is also greater potential credit risk exposure in the structure of MM CLOs. Triple-C basket limits have been 7.5% in typical BSL CLOs, which compares to the mid-teens figures in MM CLO triple-C buckets. “In the middle-market space, you typically see basket sizes from 17.5% or larger, and I think we've recently seen up to 22.5%,” the speaker added.

Panelists were also enthused about MM CLO equity. “It’s been a good year for private credit CLO equity, bad year for BSL,” a CLO equity investor who invests in both said. While an arranger noted that there has been lately more players looking at middle-market CLO equity, the investor said they were not concerned about competition for something still not as much on the radars of the broader CLO equity investor base.

“There’s sure, a lot of competitors,” the investor said, but their biggest competitor was MM CLO managers, who sometimes still take all the equity themselves. “It’s not as highly trafficked as BSL.”

5. Where CLOs feel the love

Coming back to BSL CLOs, in relative value conversations the takeaway was as you would expect: everyone wants debt and few are keen on equity, with some caveats.

The conference in this respect featured shoutouts to just about every tranche in the CLO debt stack, as “there’s insatiable CLO demand” all the way down to double-Bs, one investor noted.

Double-Bs have notably outperformed CLO equity this year, another said. Although another panelist stated they were being selective around double-Bs now and preferring them on the secondary market or as refis, while avoiding long-duration double-Bs. “There will be an unwind, spreads will unwind,” the panelist said.

Single-As are also looking slightly less attractive, another CLO trader suggested. Insurer demand for single-A notes has driven greater spread compression there relative to double-As, given that single-As are the highest NAIC 1 investment an insurer can make. “If we had real credit concerns, the credit curve can steepen a lot. You probably want to stay up in quality,” the speaker added.

Debt investors are “not concerned as much with credit quality, especially in new issues,” a CLO investor panelist said, adding that new issues tend to be cleaner deals. On the other hand, there has been “a ton of interest” for short-dated refi paper, a CLO manager noted, citing their recent such deal that priced. “There hasn’t been a ton of supply. When you do see that offensive trade, there’s guys piling into that.”

Looking across the pond, European CLO paper has been more attractive on the whole, another investor said, citing better spread on the loans and on the CLO bonds there, as well as less tail risk and defaults. In particular, “I like European triple-Bs,” the investor said. European CLOs generally have better covenant protection on loans as well, another panelist noted.

Another investor said they preferred tier 2 and tier managers with clean portfolios.

Third party US BSL CLO equity has still seen some interest, for example among smaller managers, who use it as an opportunity to get access to a capital market-type trade and to test the markets, one panelist said.

For the time being, there are still ways for managers to get US BSL CLO new issuance done with third-party equity, panelists said. Managers and arrangers in some cases have been resorting to fee holidays or fee-shares, or negotiating terms such as offering up warehouse carry, an arranger said.

Beyond those concessions, a CLO investor said, “what’s next is how clean is the portfolio, how can they maintain WAS?” Over the next few years, “it’s all gonna come down to portfolio preservation.”

6. Has captive equity gone too far?

Mirroring the generally dismal state of demand for third-party CLO equity, the rise of captive CLO equity funds has appeared unstoppable in recent years. We have reported on managers winning over LPs in droves to support a number of such funds, and the continued, albeit slower, minting of new issue CLOs despite poor arbitrage.

When asked if there is still a place for majority third-party equity, one panelist stated that while the demand for it is there now, they do wonder what the future holds for third party equity investors. With the increased number of internal equity vehicles which are set up to buy and hold forever, there are fewer places for equity investors to go in both the primary and secondary markets, the panelist said.

Another investor agreed, pointing out that the credit cycle would bring differentiation for managers’ performance, rendering some deals that had been established with captive funds unsustainable. “The providers of these captive equity funds, they may decide, it’s not worth it,” he said. “When it gets to amortization and differentiation starts to materialize,” more managers may return to third party equity.

The LPs that have boosted captive fundraising up to now could hasten that turn back towards the third-party model, another panelist pointed out. In the European market, the panelist said, we have seen many new manager entrants, several of whom have relied upon captive vehicles to print debut deals. “As soon as we have anything that detracts from the performance,” there could be an exodus of the LPs that were expecting certain returns, the investor predicted.

7. Insurers ensure innovation

Panelists discussed several interesting developments in CLO structures and documentation recently, describing much of the recent changes as driven by insurer money flooding into the private markets.

One speaker said they saw managers and arrangers trying to create more fixed-rate tranches, which they expect would be more common in a falling rate environment, and noted that insurers had been behind the demand for that feature.

“So much money has moved into the insurance world,” a speaker said, noting the growth of partnerships between alternative credit providers and insurers.

“Now the insurance world is awash with capital and term financing” and looking for how to match insurer liabilities with their payments from instruments like CLOs, the speaker said. In particular, this desire is being felt through innovation requests around reinvestment periods of CLOs.

This has been seen already this year when Golub Capital printed Golub Long Duration 2025-1, which priced with a 10-year reinvestment period and eight-year non-call, according to 9fin data and sources.

While sources tell us that insurers were not the driving force behind that particular deal and that it was rather manager-originated, the signs point to an insurer providing the CLO’s capital in this instance.

Insurers are looking for a structure with less risk and a longer WAL, the panelist said, and longer-dated deals with a premium paid on spreads would fit the ticket.

Other recent innovations and developments of note include evergreen warehouses used to source funding for multiple CLOs, which have become more prevalent, and managers calling old deals to put the loans into a warehouse, panelists said.

Additionally, there has been a trend of managers going from preferred shares in a warehouse to adopting subordinated notes as an alternative, a speaker said. This helps save on administrative fees and costs, as well as execution, allowing managers to move faster. “That’s become more popular as well, we will see it continue into the next year,” the panelist said.

8. No stopping arranger backstopping

Panelists noted that CLO arrangers have frequently been backstopping deals, which has supported spread tightening but can come at the expense of helping the market establish natural price discovery.

The practice of backstopping is now so common that arrangers are expected to offer it as a fallback option, another panelist said. Some arranger banks also find US CLO triple-As attractive and have been taking a lot of supply.

“Non-mark-to-market warehouses are not unique anymore, it’s table stakes now. You might still win mandates, but having that is more and more expected,” the speaker said.

While backstopping triple-As has proven a useful tool for managers, one speaker described the phenomenon as, to some extent, being “dealers propping up” the market, preventing manager tiering and price differentiation. “Be careful what you wish for,” they said.

Banks also played a role in preventing a broader selloff among CLO ETFs during the Liberation Day period in April, a speaker said, preventing a “disorderly” exodus. Banks helped ETFs rapidly get bonds out the door when they needed liquidity during that time, the speaker said.

“Banks would go to ETFs directly early in the morning and ask, hey, what do you have to move?” This allowed the ETFs to spread out their sales to different banks and bypass listing via BWICs which have a 2-4 hour process. However, in a true test scenario for CLO ETFs “things might get interesting,” the speaker said.

Last week was the first time since the Liberation Day period that the largest CLO ETF saw notable outflows, and this week that trend continued, as we reported yesterday.

9. Secondary CLO paper — a brief opportunity

In the past few days, there has been better value in the secondary CLO market compared to the primary market as secondary CLO paper became slightly cheaper, a CLO investor said. This was owing to some choppiness in the loan market that made its way into CLOs.

This hasn’t been true for much of the past two years, except around Liberation day, the speaker said. Prior to that, in 2023, there had been “much lower prices” and better yields in secondary, the speaker said, noting that the window of opportunity was seen across the capital structure but represented a small amount of dislocation, “almost not notable.”

The rare break for investors reflects just how much demand for CLO debt has been out there this year, and how much money is waiting to take advantage of any dislocations.