When Leveraged Loan Issuance Picks Up, CLOs Are Ready

The CLO market is structurally well-positioned to absorb an increase in primary loan issuance, with strong demand, growing reinvestment capacity, and resilient investor appetite. And while such a rise may not be imminent, CLOs will be ready when that time comes.

The broadly syndicated loan (BSL) market continues to expand, although it has experienced a period of slower growth since 2022, at a rate of 5% (or $65.5 billion) between January 2022 and December 2024, compared with 15% ($174.9 billion) over the preceding three-year period. The slowdown was due to a combination of factors, including higher interest rates and the growth of the private credit markets.1

Despite slower anticipated growth over the near term, we expect to see opportunistic deals coming to market, including refinancings and dividend deals, which are less additive to overall supply than M&A transactions. The weekly forward calendar has averaged $26.20 billion over the past 12 months, broadly in line with the $26.22 billion average over the past five years, suggesting limited expansion relative to the patterns observed in recent years.2

In our view, a resurgence in primary loan issuance would be predicated on buyers and sellers overcoming current disconnects on appropriate corporate valuation multiples. Lower interest rates would also likely support M&A, as the lower cost of financing would make LBOs more feasible.

CLO market demand is robust and resilient

In 2024, US CLO issuance reached record levels, with $202 billion in new-issue transactions and $308 billion in reset and refinancing activity.3 This strength has been underpinned in part by a broadening investor base, as CLO ETFs have grown substantially. ETF assets under management (AUM) rose from approximately $6.3 billion in December 2023 to $22.5 billion by December 2024 and had reached nearly $32 billion by mid July 2025.4

The floating-rate structure of CLO debt tranches has enhanced their attractiveness, particularly in environments marked by rising interest rates or elevated volatility. The short duration associated with these structures provides relative price stability, a feature that has been tested repeatedly since the product’s inception.

During the global financial crisis, CLOs incurred materially lower losses than other securitized products (see chart),5 highlighting the advantages of active management, diversity in terms of the issuer base and credit quality, and certain beneficial CLO structural features, including coverage tests and resulting cash flow redirection. This dynamic was reaffirmed as recently as the first quarter of 2025. Following the significant volatility in March, US banks’ reporting showed life-to-date mark-to-market losses across all other securitized holdings in available-for-sale (AFS) books, while CLO valuations remained broadly flat.6

CLO Loss Rates Were Materially Lower vs. Other Securitized Products During the Financial Crisis

Five-year loss rates from 2008-2013

Source: Moody’s Investor Service as of 6 March 2014. Five-year loss rates are cumulative.

CLO Market Value Has Been More Stable vs. Other Securitized Products

Life-to-date mark-to-market losses in US banks’ securitized holdings in available-for-sale (AFS) books

Source: BofA, “Bank for the Buck: 2025Q1,” as of 22 May 2025. Based on the change in marks from time of purchase through 31 March 2025.

Not only do CLOs offer diversity and stability in times of volatility, they currently offer a spread pickup as well. AAA and BB CLO tranches offer more spread than investment grade and high yield corporate bonds, respectively.7 CLO yields also continue to look reasonable when compared on a hedged basis to Japanese government five-year bonds,8 which ensures continued interest and demand from Japanese banks and insurance funds – traditionally large buyers of AAA and other investment grade CLO tranches. Given the current backdrop and the potential for continued volatility, we anticipate ongoing strong demand for CLOs as an asset class.

CLO Tranches Currently Offer Higher Spreads vs. Comparable Products

CLO AAA vs. corporate investment grade spread to SOFR

Source: BofA CLO Factbook as of 11 July 2025.

CLO BB vs. high yield spread to SOFR

Source: BofA CLO Factbook as of 11 July 2025.

The CLO market is primed for increased loan issuance

The CLO market’s expansion continues at a record pace. Year-to-date new issuance is tracking in line with 2024 levels, while reset and refinancing activity has reached 135% of the volume recorded over the same period last year.9

Supported by strong issuance and reset activity, CLOs in their reinvestment periods (RP CLOs) as a percentage of the total loan market have fully recovered, surpassing the former high of 52% seen in December 2021 (see green dotted oval in graph below).10 The growth in reinvestment capacity naturally drives increased demand for additional loan collateral. As BSL production has slowed since 2022, the share of institutional loans held by CLOs has risen to 66% as of June, up from 57% in January 2023.11

CLOs in Their Reinvestment Periods as a % of the Loan Market Have Surpassed the Previous High

Broadly syndicated loan and BSL CLO market size

Source: BofA CLO Factbook as of 11 July 2025 and JP Morgan Research as of 21 July 2025.

Thus far, CLO managers have navigated the lack of new loan supply by relying more heavily on the secondary loan market and to a lesser extent high yield bonds. Refinancing and amend and extend (A&E) activity has also provided some opportunity to invest in new loan collateral, as loan maturities in 2027 or earlier now represent 6% of the loan market, down from 37% as of year-end 2023.12

However, renewed primary loan issuance would be a welcome development. If we use the dollar amount of RP CLOs as a proxy for the CLO market’s ability to absorb loan market growth, historical experience is instructive. Between 2021 and early 2022 the loan market grew substantially, adding over $200 billion to grow to over $1.4 trillion. RP CLOs maintained between 49% to 52% loan market share throughout (see orange dotted oval in prior graph).

More recently, the market demonstrated its capacity to respond, when new institutional loan issuance rose sharply to $27.7 billion in May from $7.5 billion in April. CLO formation followed suit, with over $20 billion of new issuance in May, the highest monthly total since November 2024. Lastly, on the margin, trends in CLO terms during the past few years, such as the return of bond buckets and more flexibility to address liability management exercises (LMEs), have provided more levers for CLO managers to achieve strong investment results.

Over the past couple of years, we think market participants have been waiting for a resurgence in leveraged loan issuance, driven primarily by M&A and LBO transactions. While the timing of that rebound remains uncertain, the recent strength of CLO market activity has enhanced the ability of the asset class to digest and support the next phase of meaningful BSL market growth.