The US CLO market enters 2026 with a constructive tone among managers and market observers, even if issuance is expected to decline from this year, with spreads likely to steer wide of current year-end 2025 levels. The following outlook presents various perspectives on the year ahead. In summary:
- Issuance is likely to fall from 2025 levels, but remain historically robust.
- Spreads may widen slightly, but the equity arb should improve with growing M&A loan supply.
- Investors are wary, but demand will be unaffected by credit “cockroach” concerns.
Issuance of new BSL and middle-market/private credit CLOs next year is projected by most market analysts to total just under $200 billion, a level that issuers reached for a second consecutive record-setting year in 2025 (on Dec. 16, new issuance pushed to $203 billion, LCD data show). The optimism is fueled by a probable rise in merger & acquisition loan activity spurred by anticipated Fed rate cuts, along with an increasing focus on AI-driven initiatives that will drive billions in new corporate capital expenditures.
Even as favorable conditions develop for CLO creation via new-loan supply and declining prices — which offer managers par-build opportunities with discounted assets — caution still abounds over a weakening macroeconomic outlook and strained revenue for tariff-impacted sectors such as healthcare, consumer retail and automotive.
“Although strong market fundamentals should persist over the next 12 months — such as relatively high all-in base rates, continued annuity and ETF inflows, and constructive corporate balance sheets — the CLO market will contend with broader macro conditions that will be challenged and therefore present a strengthening headwind,” Deutsche Bank said in a Nov. 17 CLO market outlook report.
“We’re sitting here today in much the same place we were a year ago,” said Michael Ferrante, managing director and head of liquid credit at Abry Partners, a 2025 debut CLO issuer. “The prognostications [for 2025] were that M&A and new loan supply would pick back up again. The tariff tantrum got in the way of that, [but] we’re starting to see some M&A pick back up again, and there’s a number of large new deals coming in 2026.”
Despite uncertainties, Barrow Hanley CLO portfolio manager and analyst Nick Losey expressed optimism on CLO market fundamentals heading into 2026. “If you think about the last five or six years, more often than not, management teams have been in a recessionary mindset. We had Covid, we had supply-chain issues … and now we’ve got tariffs.”
“From a credit perspective, management teams in aggregate have been doing the right thing, deleveraging and managing their balance sheets appropriately,” said Losey. “So I do think there’s a lot to be constructive about just from the fundamental standpoint.”
Steady volume
Analysts for Deutsche Bank, Morgan Stanley, BofA Securities and Barclays all project issuance of between $145-160 billion in new BSL issuance, as well as $35-45 billion in middle-market private-credit issuance, which in 2025 has already reached a new annual peak of $38.9 billion as of Dec. 2.
In a Nov. 25 research report, Morgan Stanley said it expects a near-record year, with $200 billion in total new-deal issuance and $250 billion in combined reset/refinancing activity, supported by persistent investor demand and still-favorable funding conditions. “Demand remains robust but is normalizing from exceptional highs,” according to the firm.
Deutsche Bank’s base case is incrementally cooler: approximately $190 billion of new-issue deals in 2026 ($145 billion BSL and $45 billion MM/PC CLOs), plus roughly $245 billion of US refi/reset activity. The numbers will be down year-over-year, but still represent a robust pipeline, the firm noted. Barclays, meanwhile, has a combined $195 billion call for BSL and MM/PC CLOs for a year that “is going to be marked with increased uncertainty,” in macroeconomic, corporate credit and CLO demand dynamics, said Barclays CLO analyst Gavin Zhu, in a Dec. 4 podcast issued by the bank.
In addition to expectations for $195 billion in new-issue BSL and MM CLOs next year, BofA strategists wrote in a Nov. 26 year-ahead CLO market outlook report that their forecast is for a whopping $405 billion in anticipated resets and refinancings ($275 billion and $130 billion, respectively). Repricing deal candidates are culled from approximately $430 billion of outstanding portfolios from 2021 and 2024 vintages, which would benefit by switching to current market spreads. According to BofA, the only constraint to its projection will likely be the dealers’ and rating agencies’ capacity to arrange and rate deals.
The optimism around overall new issuance is being fueled by expectations of high demand from banks, insurers and fast-growing CLO exchange-traded funds, which have surged to $38 billion in total AUM and $15 billion in 2025 YTD inflows, according to BofA.
JPMorgan offers a more bearish outlook, forecasting $150 billion in combined BSL/MM issuance, representing a 20% year-over-year decline. In its Nov. 25 CLO outlook, the firm said it sees another year of high-volume resets and refinancings that are fueled by a “wave” of $422 billion in CLOs exiting non-call periods in 2026. “This poses the risk of market flooding,” it added. JPMorgan noted that the CLO market may lose relative value to other asset classes, with spreads at multi-year lows that push investors toward high-grade corporate debt, which offers near-equal yield against CLO AAAs.
BNP Paribas and ratings agency KBRA each provided outlier perspectives by forecasting record-breaking new issuance next year. From its Dec.4 market outlook, BNP forecast $215 billion in new BSL and MM issuance, while KBRA projected $220 billion in new CLO volume, representing a 10% jump from its expected year-end 2025 estimate of $198 billion. In its Nov. 18 report, KBRA cited a “more constructive financing environment,” particularly with private credit and direct lenders.
Jon Barry, head of CLO structuring at Abry, said managers expect more investments from insurance firms and banks following expected relief in regulatory risk-based capital charges. Additionally, foreign insurers, “specifically Singapore” companies, could be “coming into the US market as well,” he said. “There are a lot of avenues in terms of growth, and I don’t think we’re necessarily at a peak, per se.”
Spread ranges widening
The consensus among most Street calls is for modest widening of year-end BSL spreads in 2026 from unusually tight 2025 levels — more so in mezzanine and junior debt, and less so in AAAs.
The Morgan Stanley and Barclays base cases for triple-A tranches situates new‑issue spreads for Tier 1 issuers around S+125 bps. While equal to current fourth-quarter Tier 1 spreads (averaging S+122 bps, according to LCD data), they will remain wide of pre-Liberation Day levels, which were as low as 110 bps over term Sofr. Counter to JPMorgan’s observation, Morgan Stanley maintains that CLOs will maintain a relative-value advantage for investors over many other fixed-income alternatives. “AAAs are generating better risk-reward compared to corporate IG,” said Morgan Stanley CLO analyst Joyce Jiang, during a Dec.2 securitized credit webinar organized by the firm.
Deutsche Bank’s spread call maps AAAs closer to S+135 bps by year‑end 2026 (the widest projection alongside KBRA’s mid-130s prognostication), while JPMorgan expects AAAs to end next year around 130 bps. BofA sees AAAs next year ranging between 120-125 bps, “driven by the typical year-end rally before normalizing.”
BNP Paribas eyes the potential for a “modest” tightening of five basis points in 2026 from its current primary AAA spread estimate of 124 bps.
Higher loan volume in M&A/LBO
To seed a record $600 billion in primary market offerings involving both new-issue and refinanced CLOs next year, BofA is projecting 10% growth in leveraged loan issuance next year to $470 billion, driven by an increased share of corporate M&A and LBO activity already taking place, displacing volume that has been focused on repricing activity over the last two years.
BofA points to large 2025 deals such as Silver Lake’s $55 billion LBO of Electronic Arts (of which a large portion of debt is expected to be funded through the BSL market) and the $28 billion take-private transaction for Air Lease. “With potential changes to the FTC’s leadership, a M&A friendly environment, we think M&A/LBO and dividend-recap volumes increase 20% next [year] to $260 billion,” the firm stated. “Loan refinancings should remain elevated given [the] current maturity wall.”
And while loan issuance is likely to be higher, “equity arbitrage remains challenging and the market will likely focus on refi/resets” in the first half of the year, according to BofA. The equity arbitrage in deals is already thin, a result of a combination of rate reductions in existing loans through a wave of refinancings, along with limited par-build opportunities in the secondary market.
“We certainly need more supply, if nothing else, to crowd out the plethora of dividend add-ons that have been in the market of late,” said Abry’s Ferrante. “I think the investor focus on macro and earnings is really going to play a part in new issues of supply in the next year. We haven’t had a fundamentally driven market in a long time.”
Mixed performance
Portfolio performance of CLOs is mixed heading into the new year. While triple-C exposure and weighted average ratings factors are improving, Deutsche Bank noted a marginal increase in CLO-held current defaults in November to 0.5% — slightly higher than a historical average of 0.45% — which “reverses a downward trend since May” when defaults were at a one-year peak of 0.53%. Deutsche Bank also noted a rise in the percentage of loans priced below 90 cents on the dollar to 9.4%, equaling a mid-year peak that had fallen in recent months.
“We obviously saw some pretty big blowups … with Tricolor and First Brands in September,” said Jamie Flannick, a Deutsche CLO analyst, during a recent podcast issued by the firm. “And ever since then, there’s been this fog hanging over the [leveraged finance] markets.”
Still, Deutsche Bank notes that 2025 defaults have already moderated from 2024 peaks, and CLO portfolio recoveries from defaults averaged around 63%, a constructive sign even amid the headline First Brands defaults.
Featured image by Marco Bottigelli/Getty Images
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