CLO fund performance came under pressure in Q1 2025, as macro uncertainty weighed on returns. The year began with a constructive technical backdrop and healthy primary issuance (Q1 25 European leveraged loan volumes surged to ~€100bn across 131 deals, about half of 2024’s ~€200bn record first quarter issuance and the highest annual level since 2020), but returns told a more subdued story by the end of the quarter.

As the quarter wore on, macro headlines impacted CLO liabilities, which began to widen across the capital structure. European double-B CLOs were particularly affected, sources say, with spreads widening from around E+475bps to E+600bps by the end of March (with further widening to come.)

This repricing resulted in double-B total returns slipping to -1.5% for March, sources say. The move came as part of a broader pullback in risk assets, with US and European high yield markets also ending the month in negative territory, down by 1.07% and 1.0% respectively.

Across our dataset, CLO funds’ average returns dropped from 1.1% in February to -1.59% in March. Taking macro news out of the equation and there were also some idiosyncratic risks to factor in with Colisée’s downgrade to triple-C, for example, tightening constraints on triple-C buckets and dragging on performance.

Still, as reported, CLOs within reinvestment have enough headroom to deal with some additional distress. Triple-C buckets in the US stood at an average of 4.5% by the end of March, down from a high of 5.9% back in August 2024, according to data from 9fin and Moody’s Analytics. In Europe this stands at 3.9%, down from 4.3%.

Loan market weakness further fed through to CLO portfolios. In the US, roughly $25bn in loans tied to tariff-sensitive sectors —  including autos, retail, and consumer durable — fell by more than four points in March, one source said.

In the secondary CLO market, BWICs picked up meaningfully but the supply was largely absorbed, thanks to still-supportive technicals. However, the market's tone remains cautious.

Derisking ahead of volatility

Portfolio managers across the CLO landscape had to reposition as credit sold off.

Ron Zeltzer, portfolio manager at Valeur Group, said in the first quarter his firm remained cautious, but nimble.

“In early March, we exited long-dated double-Bs above par and rotated into shorter-duration triple-B positions as spreads moved wider,” he said. “By 31 March, the fund had 43% exposure to triple-Bs, while double-Bs counted for 24% of the portfolio. We ended the month with a 10% cash position, providing flexibility in a volatile environment.”

Jacob Toft Hansen, investment director at Dankse Bank, told 9fin: “We’ve been gradually rotating out of some of our triple-B paper, which had been trading at a decent premium to par, and reallocating primarily into top-tier triple-A bonds — particularly during Q1 and late Q4 of last year.”

He said this was partly to take advantage of tighter prints at a time when there was strong inflows into CLOs. It also capitalised on the seasonal softness in December, when markets tend to dry up.

“In Q1, we continued this trend. The aim was to de-risk the portfolio and create capacity in case spreads widen again.”

Hansen said Danske's primary focus has been on the European market, although the fund does hold some US exposure, looking at the region more from a relative value perspective. As is often the case with CLOs, US tranches tend to trade tighter than their European counterparts, he said. European CLOs also needs to comply with European risk retention rules and adhere to stricter ESG standards than many US deals can meet.

III Capital Management had a preference for European single-Bs in the first quarter.

“At the very beginning of the quarter, we were adding European single-Bs across our platform because they had really lagged the rally that we'd seen among other CLO tranches in US and Europe,” said Christian Pellegrino, head of structured credit at III Capital Management.

That strategy paid off, generating outperformance in the quarter.  “As the rally extended into February, European single-Bs began to catch up with the broader market.”

A key theme for the first quarter (before the sell off) was spread compression and the opportunity to upgrade credit quality.

“We rotated our double-B exposure into higher-quality tranches across our platform,” Pellegrino explained. “While we may have given up a negligible amount in price, we saw this as a worthwhile move up in credit quality.”

April brings further spread widening

Following Liberation Day on 2 April, market conditions deteriorated further, creating new uncertainties. Fresh US tariff announcements triggered one of the steepest loan sell-offs since the 2022 UK LDI crisis. The European Leveraged Loan Index (ELLI) dropped two points to 95.50 by 7 April.

European CLO spreads widened across the stack with triple-As talked around E+145bps, triple-Bs into the low-to-mid E+400s, and double-Bs around E+600–700bps. Prior to primary pricing coming to a halt at the end of March, deals were pricing with triple-As at around E+125bps, triple-Bs were at E+350bps and double-Bs were in the high E+500bps.

David Altenhofen, head of investments at Accunia, says he has discussed the risks extensively with several European CLO managers.

“Typically, they have around five to 10% of their portfolios exposed to companies where more than 20% of revenues come from the US,” he said. “So we feel that the first order effects of the tariffs will be relatively small in the leveraged loans space. Further, managers have focused on rotating out of those credits as well as the more cyclical names.”

"If we see a recession from the US on the basis of this, however — and several economists have already pointed to the fact that we are actually in a recession right now — we could see second order effects in European leveraged loan and high yield companies in Europe."

At Fair Oaks Capital, secondary markets became the focus.

Miguel Ramos Fuentenebro, partner at the firm, said that, while in 2024 and the beginning of 2025 the firm found better value in the primary market, in April, Fair Oaks pivoted and has been more active in secondary.

“This is similar to 2022-2023 where we shifted almost entirely to the secondary market, which in our view offered considerably better long-term value,” he said. He added that in tighter periods, such as 2024, Fair Oaks has allocated to triple-Bs, but as spreads wound out in April the firm found value in double-Bs.

He added: “Given the robust long term credit performance of CLOs, we think investors should consider using this macro volatility as an opportunity to enter the product at wider trading levels. For context, the average primary euro triple-B spread in February was 290bps and there are currently primary triple-B opportunities in the 375bps context — with double-Bs at 670bps.”

“There’s a noticeable dispersion in double-B pricing, but we haven’t seen many of the lower-rated, riskier bonds trade,” Pellegrino observed.

“Across our platform we added US double-Bs opportunistically, particularly during the pullback in the second week of April,” he added. “There were limited opportunities to deploy capital, which becomes somewhat challenging.”

Amid the volatility, primary CLO equity has become challenging.

“The problem is that if you've ramped a warehouse prior to April, the portfolio is sitting on several points of mark-to-market losses with tight E+350-375bps spreads, then its tough to print,” said Shawn Cooper, portfolio manager at Orchard Global. “With triple-As around 25-35bps wider, or wherever they clear, the arb makes issuance uneconomical. I struggle to see how those deals get printed in the near term.”

Of course, the CLO market is creative and may test shorter reinvestment periods and print-and-sprints should those make sense.

“It would probably be a bit trickier to do print/sprints in Europe than the US, but I wouldn't say it's easy in either location. The primary loan market isn’t really there yet and ramping in secondary has its challenges as well,” Cooper said.

Pellegrino says he may look at the European primary market.

While current warehouses are generally not in the money, managers may contribute carry and arrangers/managers may use other tools to make deals appealing to equity investors, he said.

Altenhofen adds: “There’s a possibility that some of the CLOs right now can perform really well because they locked in tight liabilities and then being able to actively manage that portfolio for the next five years.”

“Some of the newer deals that are not yet fully ramped have earned more than a full point compared with their modelled portfolio trading in the secondary market.”

Dankse Bank eyes retail investors in fund

After seeing strong inflows for most of the quarter, the tide had turned for US CLO ETFs by the end of the quarter, who suffered outflows at the end of March and through most of April. 9fin reported on how ETFs were handling this, and the impact on the secondary market.

The general consensus is that the market remained orderly, with CLO funds looking for opportunities to rotate positions within the capital stack. There were opportunities to exploit value discrepancies, particularly within the senior CLO tranches.

“In a minor sell off, where you see triple-A tranches fall 50 cents to two points, I think there can be orderly outflows and even perhaps inflows but what happens when there's a 5-10 point move at the triple-A level?” says Cooper. “Triple-A buyers were willing to step up in recent volatility, but what happens when dealers aren't willing to add risk and the triple-A buying base may not be as deep as expected?”

Meanwhile, more opportunities for retail investors were launched in the quarter.

Danske Bank AM initially launched its CLO fund in March last year for institutional investors, but in Q1, the firm launched a retail share class for the strategy. The idea is that retail investors should also have the opportunity to access CLO bonds.

“For retail investors, we see this as a good way to diversify risk — especially through less volatile exposures,” Hansen said. “Rather than holding only duration-heavy instruments, allocating some to triple-A CLOs allows you to shift part of that exposure from interest rate risk to credit risk.”

“While retail investors can buy triple-B corporate bonds directly, it involves significant credit selection and concentrated single-name risk. You typically need to buy in decent size to gain meaningful exposure. CLOs, on the other hand, offer access to a broad, highly diversified portfolio — essentially giving you wide exposure without the single-name concentration.”

From a liquidity perspective, redemptions can be made on short notice, offering T+2 settlement. And to deal with this, the fund aims to maintain a significant portion of the fund in triple-A bonds, which are the most liquid segment of the CLO market.

“In terms of fees, our pricing is roughly in line with similar ETFs. What differentiates us is the added value of active management — we adjust our risk positioning dynamically, as I’ve outlined—and you also get our ESG overlay as part of the offering,” Hansen said.