CLO Transactions: Spring 2026 Market Trends And Regulatory Developments

The US and European markets for collateralized loan obligation securities (CLOs) in 2025 carried the momentum of a robust 2024 through headwinds from tariff announcements and trade wars and two notorious private credit defaults that led to speculation about wider deterioration in the debt space.

Despite unease about the assets underlying CLOs, interest rate spreads continued to tighten throughout the year in both the underlying assets and CLO debt. Persistent headlines during the first quarter of 2026 focusing on withdrawal requests by investors in credit funds and the enforcement, in some instances, of gates to manage outflows has led to a pullback in the CLO market.

Although the regulatory burden was perceived to have eased in the United States during 2025, two pronouncements from EU regulators surprised and jolted the CLO market.

Key Takeaways

• Resilient but uneasy market: CLOs remain active with tightening spreads despite rising credit concerns and isolated defaults.
• Shift in equity dynamics: Lower returns are pushing the market toward captive equity.
• CLO ETFs: ETFs are driving demand potentially affecting pricing.
• Increasing regulatory complexity: Diverging US, EU, and UK rules are creating new compliance challenges.
• Private credit under scrutiny: Growth continues, but defaults, redemptions, and liquidity concerns are drawing market attention.

In Depth

CLO market holds firm amid headwinds, but equity pressures mount

The CLO market successfully navigated several headwinds during 2025. On the supply side, 2025 was the second-highest year on record for broadly syndicated loan (BSL) issuance, but the BSL market was dominated by refinancings. Similar trends occurred in private credit. On the demand side, CLO issuance remained robust in 2025. Spreads tightened throughout the year and new issue, reset and refinancing volume for both BSL and private credit CLOs exceeded or fell just short of 2024’s record levels.

The CLO market expected the Trump administration to be pro-growth, but it has been a mixed bag for the CLO market. Opportunistic borrowers took advantage of declining interest rates and re-priced or refinanced their outstanding debt. However, the resulting spread compression and relative loan price stability reduced returns to CLO equity, which made BSL CLO equity a less attractive investment to equity arbitrage investors, reinforcing the movement away from third-party equity to captive equity funds by CLO managers.

Due in part to (a) limited new loan supply in the BSL space, (b) equity return models remaining low, and (c) a perceived diminishing of foreign investment interest, momentum in the new issue market was subdued during the first quarter of 2026. That said, many CLO refinancings, resets, and new issuances from 2024 will exit their non-call periods in 2026 which, presuming economic growth and that interest rates stabilize, should foreshadow increased refinancing and reset activity later this year.

CLO ETFs: Market growth, structural volatility and liquidity risks

The rise of exchange-traded funds (ETFs) designed to invest in CLO securities continued in 2025. According to a report by 9fin, inflows to CLO ETFs totaled $15 billion as of December 15, 2025, contributing to a market that has grown from $120 million in assets under management in 2020 to more than $30 billion today. Demand for CLO ETFs remained strong for most of 2025, but by October the tide had turned and weekly outflows from CLO ETFs exceeded $500 million due to investor concern regarding corporate credits.

ETFs are essentially mutual funds with shares that trade on exchanges and can be acquired by retail investors through a broker. Unlike the share price of a traditional mutual fund, which is set daily, the share price of an ETF may fluctuate during the trading day. A CLO ETF can therefore experience price volatility that may not correlate with the pricing attributable to the pool of CLO securities underlying the ETF or general pricing in the CLO market.

CLO ETFs generally purchase their investments in the secondary market, but the largest CLO ETFs also purchase in the primary market, and the demand from CLO ETFs appears to be lowering CLO pricing, according to S&P Global. Although the largest CLO ETFs have focused on acquiring AAA notes issued by BSL CLOs, newer CLO ETFs target investing in more junior portions of the capital structure of BSL CLOs and in middle-market CLOs.

Trading of CLO tranches that underlie CLO ETFs is thin compared to shares owned by a typical equity ETF. But this lack of liquidity in the assets does not impact the ability to trade ETF shares. Unlike an open-ended mutual fund, which may be forced to sell assets to meet investor redemptions, ETFs are not obligated to sell investments. Rather, the ETF investors simply sell their shares on an exchange. A CLO ETF sell-off may therefore not directly impact the pricing of CLO tranches in the secondary market. In fact, an ETF’s share price can deviate from its net asset value per share (NAVPS), although trading of the ETF shares and the ability of market participants to create or redeem ETF shares tend to reconcile NAVPS and the ETF’s share price.

Turbulence ahead: Private credit faces scrutiny as it grows in the CLO market

Middle-market (MM)/private credit and BSL CLOs represent two segments of the leveraged finance market, differing primarily in the borrower size of the underlying loans, structure and liquidity. BSL CLOs issue large tranches of debt, which are rated and fairly liquid. MM CLOs are smaller and often relationship driven. Although their debt is also rated, MM CLOs typically offer higher yields to compensate for lower liquidity. The BSL CLO market was above $600 billion in 2025, while the MM CLO market was much smaller at approximately $150 billion but growing.

BSL CLOs are collateralized by loans to large corporations, typically with higher EBITDA compared to middle-market borrowers, which are widely traded and publicly rated. Information about these loans is more readily available, so there is an argument that BSL CLOs are more transparent than MM CLOs. MM CLOs are collateralized by loans to smaller, private companies, often with EBITDA below $100 million. The loans are typically originated by the portfolio manager and/or its affiliates and are not publicly rated, instead requiring credit estimates from rating agencies. Middle market loans often feature stronger maintenance-based covenants compared to the “covenant-lite” nature of broadly syndicated loans.

In BSL CLOs, managers focus on portfolio management and trading to navigate credit conditions, with the primary benefit to the manager being the payment of management fees and, if certain goals are satisfied, an incentive fee. Managers of MM CLOs use them to finance their direct lending business (which may involve business development companies or private investment funds).

We have recently seen a convergence between MM CLOs and BSL CLOs as private credit has grown. Some MM CLOs are increasingly owning larger upper middle-market loans, some middle-market funds have refinanced broadly syndicated loans in workouts, and some MM CLO managers are raising third-party equity for arbitrage.

In late 2025 the bankruptcies of an auto parts manufacturer and a subprime auto lender shook the private credit markets. In October 2025, JPMorgan CEO Jamie Dimon warned that these bankruptcies were signs of lax corporate lending practices in private credit, stating, “[W]hen you see one cockroach, there are probably more.” Even after this, the private credit markets and MM CLOs forged ahead as many investors attributed these bankruptcies to company-specific issues, rather than the private credit sector in general, and in April 2026 Dimon said that he was not worried that the risks posed by private credit were “systemic.”

Several high-profile private credit managers have been in the news recently because investors have made unprecedented redemption requests, and in some cases, managers have exercised gates that limit redemptions to specified percentages over time. The underlying speculation about these redemption requests ranges from fears that artificial intelligence will threaten the business model of software companies and concerns about conflicts in the Middle East to investors (in many cases, retail investors new to holding these types of less-liquid investments) questioning the market value of private credit portfolios. This has all predictably invited more scrutiny of private credit.

CLO documentation trends reflect ongoing debt-equity tension

CLO indenture documentation continued to evolve in 2025, reflecting a modest drift toward more debt-protective terms across a range of new issue and refinancing transactions, although outcomes varied considerably by manager and by specific provisions. Debt investors in several transactions appear to have negotiated more protective outcomes in areas such as concentration limitations, reinvestment period length, and par flush mechanics. At the same time, equity investors have negotiated to retain provisions allowing CLOs to participate in financial instruments issued in loan management exercises, creating flexibility in partial class-specific refinancings and adding the flexibility to designate an interim payment date during post-reinvestment periods to allow for distribution of cash, rather than holding it in eligible investments pending distribution.

As with any single-year snapshot, conclusions about the direction of CLO documentation should be drawn with care. Indenture terms continue to be actively negotiated, and the balance between debt and equity protections remains a live issue for all market participants.

US regulatory landscape: Assessing compliance mandates, capital reclassifications and perceived easing in oversight

Corporate Transparency Act

The US Corporate Transparency Act (CTA), part of the Anti-Money Laundering Act of 2020, requires (by regulations promulgated by the applicable regulatory bodies) the reporting of certain beneficial owner information to the Financial Crimes Enforcement Network (FinCEN). During March, 2025, FinCEN issued an Interim Final Rule, which was effective immediately upon publication in the Federal Register, narrowing the scope of reporting required under the CTA and its implementing regulations to exclude reporting from domestic reporting companies and US persons (although requiring foreign reporting companies to provide beneficial ownership information for non-US persons) and reducing the scope of reporting about US individuals by foreign pooled investment vehicles (if required to report due to being registered to do business in a US state or tribal jurisdiction).

SEC’s proposed revisions to the Custody Rule

In 2023, the SEC proposed revisions to its Custody Rule, which the agency referred to as the Safeguarding Rule. As initially proposed, the Safeguarding Rule would impose significant costs and burdens on CLO managers and completely alter the relationship with CLO custodians. A proposed expansion of the definition of “assets” from “funds and securities” to “funds, securities, or other positions held in a client’s account” would include interests in loans and loan participations. As drafted, the rule also would impose requirements to engage a “qualified custodian” and mandate audit requirements and liability standards. After receiving numerous comments and strong resistance from the industry, the SEC withdrew the proposals in June 2025. Future regulatory action on this topic must now start with a new proposal and a fresh public comment period. As of this writing, the SEC has not made a new Safeguarding Rule proposal, nor is it clear when or if a new proposal will be issued.

SEC securitization conflicts of interest proposal

In November 2023, the SEC adopted Securities Act Rule 192 to prohibit conflict of interest transactions in connection with the issuance of asset-backed securities (ABS). ABS transactions, including CLOs, in which the closing of the sale of the ABS occurred on or after June 9, 2025, became subject to compliance with the rule in 2025. CLO managers, arrangers, and other market participants focused during the year on evaluating the scope of the rule and implementing policies and procedures designed to ensure compliance.

NAIC regulatory developments

The Risk-Based Capital Investment and Evaluation (E) Working Group of the National Association of Insurance Commissioners (NAIC) has been reviewing the regulatory framework governing insurers’ investments in structured securities. Included in that effort is a proposed reassessment of risk-based capital (RBC) treatment for CLO securities and the development of a model for assigning NAIC designations and corresponding capital charges.

The primary issues relating to the CLO market are the NAIC’s purported anxiety with reliance on external credit ratings and the potential for “capital arbitrage,” where the capital treatment for securitized tranches may, due to the ratings, be more favorable than holding the underlying assets directly. CLO industry participants, particularly the Loan Syndication and Trading Association (LSTA), have engaged with the NAIC to provide the industry view on the proposed changes and the timeline for implementation. As insurers are significant investors in the CLO market, significant increases in these capital requirements would create a significant headwind for CLOs.

Other developments

In December 2025, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) rescinded their participation in the Interagency Guidance on Leveraged Lending (issued in 2013 with the Federal Reserve Board), which the OCC and FDIC stated resulted in significant growth in leveraged lending market share by nonbanks. The Federal Reserve Board has not yet rescinded the guidance that applies to banking institutions that it regulates.

The SEC issued a “No Objection” letter in December 2025, confirming that the agency will not object to the accounting treatment of CLO loan tranches (meeting certain criteria) as “receivables” for regulatory capital purposes. This guidance was predicated on several factors, one of which was that the loan tranche would not be convertible into securities issued by the CLO. This has caused investors in CLO loan tranches to exclude conversion features from the terms of these loans.

In March 2026, the staff of the SEC’s Division of Investment Management issued guidance clarifying that investments by registered funds in CLO debt securities do not count toward the 10% limitation applicable to investments in funds as set forth in the SEC’s Rule 12d1-4 under the Investment Company Act of 1940.

EU and UK regulatory activity shaping the CLO compliance landscape

European bodies delivered two shocks to the CLO market in 2025.

First, the European Supervisory Authorities issued a report declaring that the “originator sole purpose test,” used to determine whether an originator entity may serve as a risk retention holder for EU purposes, should focus on asset revenue percentage (rather than the percentage of assets on the balance sheet) and that 50% of the revenue of the risk retainer should come from non-securitized assets (widely interpreted to exclude risk retention holdings).

Second, a European Banking Authority Q&A answer from the European Commission noted that a conditional sale agreement, a widespread method used by CLO managers to qualify as originators, would not satisfy the originator requirements for a risk retention holder. As a result, the market has largely switched to forward purchase agreements to document a paper purchase of assets by the CLO manager prior to the forward sale to the CLO (where settlement typically occurs).

The securitization regimes in the EU and UK remain subject to review, and amendments are expected to be implemented in the future. For the EU regime there will likely be a lightening of reporting obligations, but it is unclear whether there will be amendments to any risk retention definitions or clarification of the originator sole purpose test.

In the UK, regulators are currently consulting on changes to the securitization framework and may have more flexibility to implement market-friendly changes, which could result in greater divergence between the EU and UK rules.

Conclusion

The CLO market currently reflects a complex mix of resilience and recalibration. Strong technical demand and innovation – particularly through ETFs and private credit structures – are offset by emerging credit concerns, evolving investor behavior, and regulatory uncertainty. As the market adapts, participants must navigate shifts in capital sources and a fragmented regulatory landscape, while remaining alert to signs of broader credit deterioration.

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