Default levels in CLO portfolios at the end of August were at the lowest level in four years amid a “still-constructive credit backdrop” for leveraged loan borrowers that have stepped up financing activity to start September, according to a Deutsche Bank CLO market report.
Deutsche Bank reports cumulative YTD defaults totaling $9.1 billion across 45 issuers held in US CLOs, well off the $26.8 billion figure from 60 borrowers from the full-year 2025 totals. About 25% of the 2026 defaulted asset level is concentrated with three issuers: Vibrantz Technologies (11%), Truck Hero (7.8%) and Perforce Software (7.1%).
“These figures point to a still-constructive credit backdrop for leveraged loan borrowers — consumer spending has remained resilient even in the face of higher costs, and corporate balance sheets broadly remain healthy,” the firm said.
About 90% of the default volume is from within the top 20 issuers.
Deutsche Bank’s model-derived default measure — which captures restructurings, distressed exchanges and technical defaults across all of an issuer’s CLO holdings — puts the cumulative default rate for US CLOs at 1.1% through Sept. 1, or about half the 2.5% rate at the same point in 2025. Deutsche Bank expects the cumulative rate to finish 2026 at just north of 2.2%, nearly mirroring the four-year low of 2.1% at the end of 2022.
Deutsche cautions, however, that stress points continue to “percolate” in the CLO market. The percentage of loans priced below 90 cents on the dollar in the Morningstar LSTA US Leveraged Loan Index remains elevated at 11.18%, up from 8.04% a year ago, and the soundness of the software sector “remains in flux due to still undefined contours of AI disruption.”
Additionally, Deutsche notes recovery rates are trending “well below” the five-year average of 60%, sitting at 55% so far this year. Meanwhile, managers are facing refinancing hurdles next year due to a steep 2028 maturity wall on CLO-held loans totaling $96 billion, of which roughly half were aggressively underwritten in 2021 at “peak purchase multiples, compressed all-in yields and elevated leverage due to abundant liquidity and aggressive underwriting,” Deutsche Bank stated.
“We anticipate a tick higher [default rate] in 2027 due to a likely rise in interest rates and a consumer that will be battling with higher prices and a likely continuation of lower wage growth due to a constructive yet relatively static labor market,” the firm stated.
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