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Few periods have tested credit discipline like the current one. Bhavin Patel, chief investment officer at Redding Ridge Europe, tells 9fin about the widening dispersion across loan markets, the growing risks in B3/B- cohorts, and the hidden cracks masked by technical strength. With 2026 approaching and a big maturity wall in sight, Patel says Redding Ridge is tightening surveillance, exiting early on deteriorating names, and focusing on downside-protected credits with a clear reason to exist.

1. Credit fundamentals are expected to weaken through 2026 due to market bifurcation, creating elevated tail risk. What lessons did recent defaults provide CLO managers about identifying deterioration early, and has it influenced how you monitor lower-tier credits heading into 2026?

Events over the last few years have reinforced the importance of early identification of liquidity strain and governance deterioration — particularly in sponsor-less credits with aggressive capital structures and opaque reporting. Recent credit mistakes you saw in the market are a reminder that 'technical strength' often masks fundamental erosion. We closely monitor any lower-tier names through deeper sponsor engagement, rigorous tracking of working capital burn and amendment frequency, and a high degree of focus on forward-looking indicators such as covenant erosion and vendor stretch. Heading into 2026, we’re running tighter bottom-decile surveillance and emphasising proactive exits when we see early behavioural red flags.

2. Price dispersion increased sharply through 2025, with the share of sub-90 assets rising noticeably. How did that shape your trading activity this year, and how do you expect to take advantage of, or defend against, dispersion in 2026?

We have moved into a ‘K-shaped’ loan market, with the ‘haves’ and ‘have nots’ – if the credit’s performance is tracking well, it will have a strong bid, good liquidity and trade 100-1+. On the other hand, we’ve seen names miss on earnings and trade off 10pts due to thin liquidity and/or rating downgrade risk. We have leaned into that by using volatility to reposition around high-quality credits trading at stressed levels, while pruning weaker tail exposures.

This will have an impact on resetting CLOs as investors are asking tougher questions on exposures and want to see cleaner deals getting reset. The cleaning up of deals to reset contributes to the negative technical you're seeing in the stressed part of the loan market and unsurprisingly, a lot of these names are triple-Cs. In 2026, we expect dispersion to persist, and plan to stay nimble — pairing active trading with fundamental credit re-underwriting to capture dislocations when sentiment overshoots risk.

3. Defaults in 2025 are running close to last year’s pace, yet recoveries generally remained unusually high. Do you expect this dynamic to hold in 2026, or do you foresee a shift in recovery outcomes?

I think we have seen a decent amount of sponsor support for credits that ‘need’ to exist i.e. good business, bad balance sheet. CLOs are major stakeholders in restructurings and are incentivised to cut a deal with as much reinstated debt as possible and I think that keeps recoveries artificially high. We do not assume this market dynamic will persist. As we move into 2026, we expect recoveries to normalise lower, particularly for small-cap and B3/B- issuers with limited liquidity or sponsor willingness to reinvest. Sponsors and markets have done an incredible job in extending capital structures and repricing the entire market on the BSL side. As we go into 2026, investors will need to take a view on the 2028 maturity wall as that will certainly impact default rate and recovery. Our focus remains on first-lien, downside protected credits which have a reason to exist.

4. How are you responding to the broad reduction in double-B OC cushions across the market, and what adjustments have you made to protect headroom in deals where cushions have compressed the most?

We recognise that double-B cushions have compressed for many of our peers, which can lead to test-driven portfolio management to preserve limited headroom. Our approach is different. Structurally, we issue with more cushion up front, so CLO tests do not dictate our decisions over credit. On the portfolio side, we run conservatively and exit early when deterioration emerges, and we have not seen material deterioration across our deals this year. As a result, we’ve maintained top-tier double-B cushions in the market.

5. Looking ahead to 2026, where do you think the market is being overly complacent and where do you think risks are being overstated?

We think markets remain too complacent about the long tail of dispersion in lower-rated cohorts — especially B3/B- credits where underwriting assumptions have yet to be tested in a true earnings recession. Conversely, we see risks overstated around high-quality performing loans that have widened in sympathy with weaker peers; there’s still selective value there. Across managers, dispersion in B3 exposure is wide — and how that’s managed will separate those positioned for downside resilience from those reliant on benign conditions.

6. A lot of managers are talking about the European opportunity — how are you at Apollo/Redding Ridge set up to take advantage of this?

Europe represents one of the most compelling multi-year investment opportunities we see globally — a “once-in-a-generation capex cycle” driven by energy transition, digital infrastructure, and re-industrialisation. The region’s financing needs are too large for bank balance sheets alone, creating a structural opening for scaled private capital.

We think Apollo’s credit business is uniquely positioned to meet these market needs, investing across both public and private markets as one integrated platform, and bringing scale, flexibility and long-duration capital to borrowers. Our Redding Ridge CLO franchise operates alongside our credit business, sharing teams, analytics, and distribution. That connectivity allows us to move capital seamlessly between liquid loans and bespoke private solutions — pricing risk consistently and capturing relative-value opportunities across the capital structure.

With deep on-the-ground presence in London and a broad sponsor and banking network across the continent, we can originate, structure, and distribute in real time as markets evolve. The same infrastructure that supports our public CLO vehicles also feeds Apollo’s private strategies, giving us scale, data, and sourcing advantages that few peers can replicate. In short, our public-private integration and European footprint give us the ability to underwrite large, complex financings while maintaining the discipline and speed that investors expect from Apollo.

7. In a market where documentation is becoming a battleground (such as attempts to add anti-co op language) how do you internally score sponsor behaviour? How do you evaluate documentation quality when selecting assets and how much does sponsor discipline matter relative to credit fundamentals?

In my mind, discipline around documentation negotiation has always been the battle, and unfortunately standard document terms have deteriorated with the last 15 years or so of accommodative market conditions. We don’t formally score sponsor behaviour in the CLOs, but we are very focused on transparency and historical credit discipline — how they manage liquidity, whether they pre-emptively engage on issues, and how fairly they allocate risk between lenders and equity.

We weigh sponsor behaviour alongside credit fundamentals when underwriting new loans. Well-capitalised, blue-chip sponsors that preserve lender optionality and avoid aggressive tactics are where we spend a large portion of our investing time — these are our strong relationships. In our experience, sponsor discipline is often the decisive variable between a manageable workout and a capital impairment.

8. Given the volatility in European CLO NAVs this year, how do you think NAV movements will influence investor tiering, manager differentiation and relative value discussions in 2026?

The volatility in European CLO NAVs this year highlighted how sensitive mark-to-market spreads have become to dispersion in collateral quality and liquidity. For investors, NAV movements have become a proxy for manager discipline — a differentiator that we expect to matter more in 2026. Managers that have consistently maintained higher-quality pools and tighter credit control are seeing improved investor tiering and tighter secondary spreads. We expect NAV transparency to become increasingly central to relative-value discussions, especially as investors weigh total return versus mark-to-market volatility.

9. As we head into the season break, what holiday tradition from your childhood still brings you joy today?

Putting up the Christmas tree on 1 December has always been a tradition in my house — it’s the starting gong for the festive period and we’ll crank up all the Christmas classics with wine and mince pies to help us along.

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