The CLO market was coming to terms with mixed signals this week in New York City, as managers, investors, arrangers, and assorted other industry participants gathered at DealCatalyst and LSTA’s annual CLO industry conference. Hanging overhead was the dreaded “T-word,” as some panelists put it, which was clouding forecasts for market participants. 

Since the announcement of those global tariffs on 2 April, CLO spreads have widened quickly and primary activity slowed dramatically. Last week for instance, US CLOs saw only $3.2bn of issuance — only a third of the average weekly issuance volume of $9.5bn year to date, as we’ve reported. “On Liberation Day… we were liberated of our reset pipeline,” one panelist quipped.

The CLO market has scrambled to draft new playbooks, faced with tariffs on a vaster scale than in Trump’s prior term. Gone is the jubilation of the winter, when despite some concerns about US policy and LMEs, the outlook was rosy coming into the new year, with M&A seemingly set to roar back and issuance poised to challenge 2024’s heights. 

Even the fatigued satiation of Vegas in February, when everyone wondered if the market was reaching its limit on CLO spread tightening, seems to have faded into history. However, speakers this week marshaled hope that the industry would come together, as it’s done in the past, to push on. 

“We’re not here to sit around and wait for tweets. We’re here to get deals done,” said one panelist. “And okay, the economics will look tough… can we tranche things a little differently?”

Optimism vies with fear 

Conference attendees were generally united in their belief that the broader markets are headed for a rough time, but also expressed confidence that CLOs would rise to the challenge.

An overwhelming majority of respondents, polled for their recession outlook during one panel, said they believed we are either already in a recession (38%) or headed for one in the second half of the year (34%). In another panel, 63% of poll respondents said they expected a recession this year.

Yet when asked how far US triple-A spreads could widen out, the most common response was SOFR+120bps-140bps, suggesting a greater measure of optimism than the prospect of a recession might suggest. Tier one triple-A prints in the primary market this past week have been at S+135bps, according to 9fin data, although that is partly due to pre-placed tranches, and the true level remains to be seen. 

Spreads in prior downturns have gapped out much wider, though one panelist said she thought the likelier scenario would see spreads go wider than S+150bps. 

In a similar poll, respondents were asked for their predictions in CLO issuance this year. The top answer was $160bn (45%), followed by $180bn (40%), and $200bn (14%), and as one panelist pointed out, $160bn of US BSL CLO new issuance would still be the third-largest year of new issuance on record. 

In the private credit and middle-market realm, 43% of polled audience members thought that the share of middle-market CLOs would stay at around 20% of total issuance, and 47% said they expected that to increase. 

One panelist offered a pessimistic opinion, noting that if the continued economic uncertainty continued, you might begin to see cracks in the middle-market CLO investor base, whilst another argued that even if you did see a pull back in private credit CLO investors, you’re likely to see similar in the BSL space, meaning it’s reasonable to expect a flat share of total issuance.

So why the apparent contradictions? Generally, US policy and tariffs have so far been grimmer than the tea leaves suggested, but the markets continue to find investor depth with players like pensions and insurance firms cited among those showing more interest. 

One panelist noted they were even able to upsize a recent deal that priced after Liberation Day. 

“That demonstrates the depth of the market even in these volatile conditions,” they said, adding that if rates are higher for longer with the prospect of inflation returning, floaters and CLOs can remain attractive. 

Other panelists cited the resilience of CLO ETFs, whose outflows were absorbed in a measured way by secondary markets and are now starting to see some retracing with inflows. Participants also noted the fact that debut managers continue to arrive, as further encouraging factors. 

Defaults are set to rise 

Attendees generally shared the conviction that defaults will rise in the coming months. However, views were mixed on when exactly they would set in for CLOs, and to what extent issuers would be affected. One panelist noted that CLO double-B tranches could see a rise in defaults with it likely that an increased number will not receive full principal back at the end of the deal, though that has been a rare event thus far, they noted. 

On the underlying cause of this potential stress, when polled on where defaults go in the next 12 months, the largest number of respondents said 4-6% (43%). Another 37% of respondents said 2-4%, while 15% predicted defaults would rise to 6-8%. 

Already over the last year or so, one CLO manager said, a good amount of companies were “razor thin” for free cash flow, so their health was “not great.” At this point, several issuers in his portfolio say they will pass the costs of tariffs on to the consumer. “I’m a little nervous about where credit stands on a longer term basis,” they said. “We’ve got a large exogenous shock that could push things into an adverse credit cycle,” the panelist added. 

Add to that the continued use of loose documents in loans, particularly in BSL CLOs, and the specter of greater LME activity is also a haunting one. 

While managers are generally avoiding the obvious names that would be pummeled by tariffs, in sectors such as retail, auto, and metals, as well as industrials and building products, there are many second-order effects that will be hard to predict. 

“If you step back and say, I’m a software company, who are my end customers? They might be exposed. You might be worried about credit quality of your counterparties. Tariffs are just part of this, the economy is going to deteriorate,” a panelist said. Looking ahead, “everything relies on the consumer” but consumer confidence is in decline. 

Other panelists noted that the impacts of factors like cuts in government spending, and harsh border treatment scaring off foreign tourists, will ripple through other sectors. 

In direct lending, many of the companies are single-B companies, and so “we’re going to see defaults rise,” one panelist noted. Good companies will be supported by sponsors but others will go by the wayside, they said. 

Another manager said that in both their BSL and middle-market issuers, the numbers look “okay” so far and no performance strains have been seen. However, their expectations of defaults will rise in the latter half of this year. “Certainly higher than now,” he said, adding that the pain is expected to be felt more in the BSL space which has more multinational companies than the middle-market ones. A recession being more likely though, that pain would also spread to the smaller middle-market issuers who have in some cases taken more leverage on. 

On the other hand, the moment has presented opportunities for scooping up the right names that may have been caught in a broader sector selloff. Shortly after the tariffs came out, a manager said, when you saw one company was sourcing 60% from Asia and another had almost nothing, “there was a trade to be made right away.” But as time went on, those trades will be harder to make as the knowledge comes out and issuers disperse. 

Issues with issuance

Alongside the fall off in repricings, new issuance has also dropped off, but investors at the conference discussed how managers were trying to get deals over the line. 

A true print and sprint deal, which has been increasingly talked up as the way to go in times of volatility like this, is harder to execute than it looks, panelists said. We so far have seen quasi print and sprints in Elmwood 41 and Golub Capital Partners Static 2025-1, according to 9fin sources, and a bona fide print and sprint in Elmwood 42. 

“We can do print and sprints but when the market is going up and then down, it’s hard to have a lot of issuance. People don’t exactly know what to do,” the panelist said, adding that there have been days when the bid-ask was as wide as 135-160, or 140-160. “I don’t remember a time when we were hearing that for true primary new issuance,” they said. 

Warehousing is having a retro moment and coming back into the spotlight at this point more generally. While in 2021 and 2022 “people got burned” with ramping warehouses, today those who have the ability to bring on “permanent third party equity” to help with ramping have the advantage, one panelist said. 

People have been able to source high quality assets at 98, but it’s not ideal to source the remainder of the assets today, one panelist said. If a manager can partner with an equity investor willing to lend them their first loss, “that becomes very valuable,” one panelist said. At the moment, the loan spread in portfolios is significantly lower than in past periods of CLO liability widening, they said, citing loan spreads on average in the 300s and in some cases as low as 275. The DMs will be lower than in 2022 and 2023 print and sprints, making the arb challenged, they added. 

Investors in general remain eager to deploy, with dry powder being invoked frequently. The hard part has been waiting for spreads to firm up, panelists said, and secondary markets have been busy of course.

Will you be joining us at DealCatalyst's 2026 CLO Industry conference? Check out the agenda and sign up here.