CLOs hold a commanding share of European leveraged loans. While CLOs have long been an essential source of liquidity to loan issuers, new research from Barclays shows that CLOs and warehouses own 69%-71% of European leveraged loans — up from 62%-64% at this point last year.
CLOs’ pre-eminent position poses several risks, given the dynamics of the leveraged loan market.
There is a chronic undersupply of leveraged loans at a time when new CLO issuance is soaring and is expected to reach approximately €59bn this year, according to Bank of America (BofA). More CLO managers chasing fewer leveraged loans pushes up their price.
The majority of loans trade at or above par until they suffer a credit rating downgrade to the dreaded triple-C level, at which point prices head southwards with rapidity. Look no further than First Brands and Archroma for proof.
Questions must now be asked about whether the price of most leveraged loans has much relation to the credit fundamentals of the borrowers.
The leveraged buyout (LBO) market is stagnating and the eurozone economy barely has a heartbeat, with EU Commission figures showing just 0.1% GDP growth in the second quarter of 2025.
And yet most loans continue to trade at par because demand from CLOs is such that loans from issuers of many different stripes retain value. Are all borrowers really so healthy?
Such a large portion of leveraged loans is owned by CLOs that the their price has more to do with the the needs of the former than the creditworthiness of borrowers, distorting the leveraged loan market.
Add to that the private credit sector's incursion into sub-investment grade lending and there is even less debt to hoover up into CLOs.
Some loans should be trading at par, while the prices of others have been inflated to par. Conversely, CLOs’ limited tolerance for triple-C credits leads to these credits trading cheap.
CLO managers are, to an extent, victims of their own success, launching more deals in response to investor demand. This causes loans to gravitate to par and makes separating the strong credits from the weak more difficult.
Increasingly, CLOs’ outsized influence on the leveraged loan market risks making it a tail that wags the dog.