European CLO investors face up to tiering amid turbulent loan market

New European CLO issuance has shattered records in 2025, already surpassing 2024 deal volumes. The market is showing no sign that it will slow down in 2026 either. Sources note that 160-180 financing warehouses were open in November, compared with 90-100 at the same time last year, meaning a market set for further expansion.

A total of €51.75bn of new issue CLO deals had been priced by early November, data from KopenTech shows. By contrast, S&P research indicated that €45.9bn of new issue transactions were priced in Europe in 2024 — the previous biggest year for CLO issuance.

“Despite the uncertainty created around factors such as tariffs and other geopolitical tensions, investor sentiment has been buoyant,” says Anusha Singh, head of EMEA CLO primary at JP Morgan. “On the manager side, there has been a desire to grow AUM and to do resets and refinancings while market conditions remain favourable.”

Most participants in GlobalCapital’s European CLO market outlook survey think new issue CLO volumes will rise next year, with 45% of respondents forecasting an increase of less than 10% and 18% expecting an increase of more than 10%.

Strong appetite from new investors has propelled the European CLO market in 2025. This cohort has included more investors from Asia, with Japanese investors in particular directing more capital to Europe. Investors have shifted more broadly towards Europe in light of political uncertainty in the US.

Charlotte Claraco, a managing director at Permira Credit, highlighted the flight of investors to Europe, telling GlobalCapital: “The European CLO investor universe is expanding. We are seeing interest from investors that were traditionally focused on the US market and are now looking to deploy capital into Europe.”

Tariffs introduced by US president Donald Trump this year have made Europe a more stable prospect for investors. “US CLOs are more diversified in terms of issuers, but their exposure tends to be weighted more towards the US,” says Claraco. “In contrast, investing in European CLOs offers diversification through different geographies.”

The basis between US and European CLO spreads has incentivised investment in European CLOs. Bank of America (BofA) research shows US triple-A rated CLO notes in November were being priced in the low-120bp area, compared to the high-120bp to low-130bp range in Europe.

Though European CLOs continue, on average, to be priced wide of their US counterparts, spreads have tightened considerably relative to the first half of 2024.

The weighted average cost of capital (WACC) of European CLOs fell from 222bp in the second quarter of 2024 to 202bp in the same period of 2025, according to data from Partners Group.

As liability pricing has tightened, borrowing costs for leveraged loan issuers have dropped. “As a floating rate product, CLOs represent a very efficient conduit of funds into the broadly syndicate loan market,” notes Rob Reynolds, head of CLOs at Pemberton Asset Management. “Indeed, borrowers have benefited in two ways: Firstly, from a reduction in base rates of circa 2% since the end of 2023. Secondly, as CLOs have largely passed on the reduction in the cost of liabilities. For companies with large syndicated loans, the combined effect is a significant cost saving.”

The size of European CLOs is also creeping up from the €400m market standard, as large new issue deals, such as Arini Capital Management’s €615.7m European CLO VII, demonstrate.

“Issuance sizes for CLOs will grow in 2026. We have been stuck at €400m benchmark size since the beginning of the CLO 2.0 era,” says Mehdi Kashani, head of structured credit at Arini.

“I am expecting that with increased demand across the capital structure that transaction sizes will trend towards €500m benchmark size on a more consistent basis. I think we will see a continued uptick in volumes, both in terms of primary issuance and secondary trading. The advent of CLO ETFs will certainly help that.”

KopenTech data shows that the average European new issue deal size was €431.2m between January and early November 2025.

The US has more than 150 CLO managers, with about half that number in Europe, according to TwentyFour Asset Management.

But data from TwentyFour also shows that, at $930bn, the US CLO market is roughly three times larger than the $290bn size of the European market .

The European CLO market has, nonetheless, added first-time issuers, with managers such as Royal London Asset Management and Silver Point pricing their first deals. This is likely to continue in 2026, with 55% of survey participants expecting there to be six to 10 debut CLOs next year.

There is almost certainly a link between the growing availability of captive CLO equity and the number of new managers. “We have seen even more managers price their debut CLOs in the European market this year,” says Gauthier Reymondier, a partner at Bain Capital Credit Europe. “In my view, this has come from demand for CLO equity from investors, which is crucial for CLOs.

“Demand has been fostered by the fact that many managers now have captive equity vehicles that can take the majority equity position or all the equity in their deals. With fewer CLOs needing third-party equity, appetite from investors has increased for CLOs that do choose to raise equity. The pace of CLO issuance has also increased as a result.”

Alongside soaring new CLO issuance, a high volume of reset deals has been a feature in 2025. As of early November, €49.11bn of reset deals had been printed this year, compared with €29.86bn in the whole of 2024, according to KopenTech.

Managers of CLOs have taken advantage of the lower spreads on offer to reset deals, bringing pricing down and improving the arbitrage for equity investors.

Average coupons on triple-A rated CLO notes were at 191bp in the second quarter of 2023 and 146bp in the same quarter of 2024, Partners Group data indicates.

The average triple-A spread tightened to 133bp in the second quarter of this year. Consequently, a large number of deals from 2023 and the first quarter of 2024 have been reset.

The movement of spreads will partially determine the volume of resets next year.

A majority of survey participants expect some widening of spreads during 2026, with 36% predicting widening of less than 15bp and 23% anticipating widening of more than 15bp over the course of the year.

“In terms of reset activity in 2026, as with any year, if spreads widen, there will be lower volumes,” says Matthias Neugebauer, a managing director at Fitch. “Even if spreads stay where they are, resets from 2024 will eventually dry up, once the early 2024 deals have been reset.

“I think managers would wait a bit before resetting deals from the second half of 2024. If spreads tighten a little bit, we could certainly see as many resets as we have in 2025, or possibly more as the big vintage of 2021 deals come out of reinvestment.”

The average triple-A coupon for the third and fourth quarters of 2024 was 129bp, according to Partners Group. This is broadly in line with current spreads, meaning that some tightening would need to take place for deals priced in the second half of 2024 to be reset next year.

The European CLO market endured two major regulatory upheavals during 2025.

The first came in April, when the European Supervisory Authorities (ESAs) interpreted the sole purpose test to mean that no more than 50% of the revenue from an originator can come from retention investments. This caused many managers to re-evaluate their retention structures.

The second jolt relates to non-EU managers’ status as originators rather than sponsors. “Post-Brexit, CLO managers outside the EU and US CLO managers have needed to find a way to be eligible risk retention holders,” says David Quirolo, a partner at law firm Orrick. “They can no longer be sponsors and have to be originators.

“In order to make the originator model more efficient, manager-originators were using conditional sale agreements, which required manager-originators to buy back assets that defaulted within 15 days from CLOs.”

In August, the European Commission responded to a 2021 question about originators’ use of conditional sale agreements. “The EU Commission has now indicated that the use of CSAs does not make an entity an originator,” says Quirolo. “It does seem a bit unfair to exclude these managers based on the use of such agreements, in that the Commission has been clear that managers are good risk retention holders.”

In a more positive regulatory development, the Commission’s proposed changes to Solvency II for insurance companies will see a reduction in the regulatory capital requirements for insurers investing in CLOs.

If formally approved, these changes will come into force in early 2027, growing the buyer base for the asset class.

CLO equity arbitrage has compressed over the course of 2025. Successive waves of asset repricings have occurred and while liability pricing has tightened, it is still elevated relative to 2020 or pre-Covid levels.

“I think the market for CLOs is fundamentally healthy. But there are still some technical headwinds that will make CLO issuance more complicated,” says Ed Watson, global head of CLO equity solutions at JP Morgan.

“The equity arbitrage is quite tight, with double-B and single-B tranches being issued at par, which reflects tight relative value through the capital stack.”

Despite this, CLO issuance has reached unprecedented heights. Third-party investors may have taken a view that arbitrage and returns will improve over time but lower initial returns may eventually make CLOs less attractive to equity investors.

“The day-one arbitrage makes it difficult to get an IRR of 15%,” says Watson. “In this context, the need for about 40% of managers to raise third-party equity targeting that context of IRR on a deal basis will be a natural brake on CLO issuance, alongside tight loan pricing.”

Among the most pressing concerns for CLO managers moving into 2026 will be the bifurcated nature of the leveraged loan market.

Research from Barclays in early November referred to 55% of loans trading at par and 5% of loans trading below a price of 80.

A dearth of leveraged loans relative to demand from CLOs has caused the majority of credits to trade at par, before falling rapidly in price in the event of a rating downgrade to B- or triple-C.

The shortage of leveraged loans is connected to a softer leveraged buyout (LBO) market, as private equity sponsors have struggled to achieve returns in a period of elevated interest rates and public equity prices.

The situation is unlikely to improve much next year, survey participants believe, with 41% of respondents thinking loan supply will increase by only a small amount in 2026, while 32% predict little or no change.

Managers face the prospect of collateral pools declining in quality due to credits unpredictably falling to a triple-C rating, at which point they become difficult to sell.

This can cause overcollateralisation tests to be breached if triple-C rated credits make up more than 7.5% of portfolios, lowering returns for equity investors.

More than half of survey participants expect an increase in the percentage of triple-C credits in CLO portfolios, with 36% predicting an increase of up to one percentage point and 23% expecting a rise of one percentage point or more.

In the next year, there will probably be more tiering among managers in the pricing levels they can attain, as investors become more focused on credit quality.

“Credit selection is going to define CLO performance over the next year, and we believe that dispersion will continue to dominate,” says Jacob Walton, co-head of European CLOs at Sona Asset Management. “However, the CLO market does benefit from healthy aggregate fundamentals.

“Default rates are low and managers are being careful about tail risk on the whole. There are also supportive technicals, whether it be global interest in European CLO triple-As or the large number of CLO equity funds being raised. Managers and investors are currently highly vigilant on idiosyncratic risk.”