CLO markets show resilience amid regulatory shifts and shifting investor dynamics in 2026

The US and European CLO markets entered 2025 with the momentum of a strong prior year, and managed to absorb a series of shocks without losing their footing. Tariff announcements and trade-war rhetoric rattled leveraged finance early in the year, while two prominent private credit failures fuelled speculation that stress in parts of the debt market could spread more widely. Even so, spreads continued to grind tighter across both underlying loans and CLO liabilities, showing that demand remained firm despite rising unease.

That resilience, however, has not erased the sense that the market is changing. According to the law firm analysis, the first quarter of 2026 opened with a more cautious tone as investors focused on redemption requests in credit funds and, in some cases, the use of gates to slow withdrawals. Those developments appear to have prompted a pullback in new CLO activity, even after a year in which issuance remained broadly healthy.

The broader backdrop is still constructive. BlackRock describes CLOs as a large and mature part of the fixed-income universe, with the global market now around $1.5 trillion, comparable with the size of the US high-yield bond market. Guggenheim Investments has said CLOs bought 61 per cent of all new-issue leveraged loans in 2024 and owned 64 per cent of the overall leveraged loan market, underlining how central these vehicles have become to corporate credit distribution.

Yet the economics of CLO equity have become less compelling. As borrowers took advantage of falling rates to refinance and reprice debt, the resulting spread compression and relatively stable loan prices reduced returns for equity holders. That has helped push the market away from third-party equity and towards captive capital supplied by CLO managers themselves, a shift that appears to have been reinforced during 2025.

The supply picture was mixed. Broadly syndicated loan issuance was strong, reaching the second-highest level on record, though much of the activity reflected refinancings rather than fresh borrowing. Private credit followed a similar pattern. New issue, reset and refinancing volumes in both broadly syndicated and private credit CLOs either matched or came close to the record levels of 2024, but the first months of 2026 have been quieter, held back by limited new loan supply, weaker equity returns and fading enthusiasm from some foreign investors.

There are reasons to expect activity to recover later in the year. Many CLOs issued in 2024 will exit their non-call periods during 2026, creating a potential wave of refinancing and reset transactions if growth holds up and rates stabilise. For now, though, the market is waiting for clearer signals from both credit conditions and monetary policy.

One of the clearest structural shifts has come from the rise of CLO exchange-traded funds. According to 9fin, inflows into CLO ETFs reached $15 billion by mid-December 2025, taking assets from about $120 million in 2020 to more than $30 billion today. Demand was strong for much of last year, but by October weekly outflows had exceeded $500 million as investor concern spread across corporate credit. S&P Global has said that ETF demand appears to be putting downward pressure on CLO pricing, particularly in the highest-rated tranches.

The ETF format has broadened access to CLOs, but it has also introduced a new layer of volatility. Because ETF shares trade throughout the day, their prices can move independently of the underlying CLO securities. That means ETF sell-offs do not automatically force sales of CLO tranches, although sustained outflows can still affect sentiment and secondary market pricing. Deloitte has described the spread of CLO-backed ETFs in Europe as part of the market’s maturation, turning AAA tranches into liquid income products for a wider investor base.

Private credit remains another area of growing attention. Middle-market CLOs and broadly syndicated CLOs now sit alongside one another in a much larger leveraged finance ecosystem, but they are materially different. Broadly syndicated CLOs typically hold loans to larger public companies and trade more actively, while middle-market CLOs are tied to smaller private businesses, often with stronger covenants and less liquidity. The middle-market CLO market remains much smaller, at around $150 billion versus more than $600 billion for broadly syndicated CLOs, but it continues to expand.

The sector came under sharper scrutiny after the bankruptcies of an auto parts manufacturer and a subprime auto lender late in 2025. JPMorgan chief executive Jamie Dimon warned at the time that the failures could point to broader weakness in private credit, though he later said in April 2026 that he did not view the risks as systemic. Even so, the combination of redemptions, gates and valuation questions has intensified the debate over whether growth in private credit has outpaced the market’s ability to assess risk.

Documentation in the CLO market has also evolved. The McDermott analysis says 2025 brought a gradual tilt towards more debt-friendly terms in a number of transactions, with investors in some deals securing tighter concentration limits, shorter reinvestment periods and more restrictive cash-flow mechanics. At the same time, equity holders continued to resist the loss of flexibility, preserving language that allows CLOs to participate in financial instruments issued during loan workouts and to better manage cash distributions after the reinvestment period ends. The result is a market still defined by negotiation, with no clear single direction.

Regulation remains a major source of complexity. In the US, the Corporate Transparency Act was narrowed in March 2025 after FinCEN issued an interim final rule reducing reporting obligations for domestic reporting companies and US persons. The SEC also withdrew its proposed Safeguarding Rule in June 2025 after heavy industry resistance, leaving any future revival to begin again with a fresh proposal and comment process.

Another SEC development affected the market more directly. Rule 192, adopted in 2023 to address conflicts of interest in asset-backed securities transactions, became applicable to CLOs closed on or after 9 June 2025, forcing managers and arrangers to assess compliance policies in detail. In December 2025, the SEC issued a no-objection letter on the accounting treatment of certain CLO loan tranches as receivables for regulatory capital purposes, which has encouraged investors to avoid conversion features in those instruments. Then, in March 2026, SEC staff clarified that registered fund investments in CLO debt securities do not count towards the 10 per cent limit on investments in funds under Rule 12d1-4.

Insurers are also watching the National Association of Insurance Commissioners, which is reviewing the capital treatment of CLO securities and the role of external credit ratings. Any increase in capital charges would matter because insurers are significant buyers of CLOs and could damp demand materially.

The sharpest regulatory surprises, however, came from Europe. According to the law firm analysis, the European Supervisory Authorities said the so-called originator sole purpose test should be judged mainly by revenue composition rather than balance-sheet assets, with at least half of the risk retainer’s revenue needing to come from non-securitised assets. Separately, a European Banking Authority Q&A response, as described in the article, indicated that conditional sale agreements would not satisfy originator requirements for risk retention. In practice, that has pushed the market towards forward purchase agreements. The UK is reviewing its own securitisation framework as well, raising the prospect of further divergence between London and Brussels.

For all the unease, the CLO market has shown a strong ability to adapt. It remains supported by structural demand, by the spread between asset yields and liability costs, and by a growing and increasingly sophisticated investor base. But the combination of weaker equity returns, private credit scrutiny, ETF-driven flows and a more fragmented regulatory landscape suggests the next phase will be less about expansion at any price and more about calibration.