Collateralized loan obligations (CLOs) — debt securities backed by a managed portfolio of leveraged loans — constitute the largest AAA-rated, floating-rate asset class and are seeing increasing demand from banks and the rise of CLO exchange-traded funds (ETFs). This demand has driven spreads on CLOs to near their post-Global Financial Crisis tights. When these spreads tighten, new CLO creation tends to increase as CLO managers raise equity and purchase leveraged loans to issue new CLO debt at lower spreads. Today’s Chart of the Week illustrates how the CLO market continues to increase in size relative to the leveraged loan market.
Gross issuance for both the leveraged loan and CLO markets set new annual records in 2024, exceeding $1.3 trillion in leveraged loans and slightly under $500 billion in CLO.1 Despite record new issue volumes, the size of leveraged loans and CLOs outstanding increased by $21 billion and $43 billion, respectively in 2024.2 The modest growth in market size can be explained by the large percentage of issuance in each asset class that was used to lower the cost and/or extend the maturity on existing debt. 87% of leveraged loan issuance and 59% of CLO issuance were issued to reprice or refinance existing debt, the highest percentages on record.3 Additional amortization and outright call activity of existing CLO debt reduced net supply by an estimated $137 billion.4
Key Takeaway
Estimates for 2025 indicate another robust year of gross CLO issuance based on an improving regulatory outlook for banks and heightened interest rate volatility driving demand for floating-rate CLOs. The sources of this gross issuance are important for the path forward for CLO spreads. Net CLO supply faces headwinds from a lack of leveraged loan supply due to low levels of mergers and acquisitions and leveraged buyout activity. As demand from CLOs drives prices higher and spreads lower for leveraged loans, the economic incentive — known as the CLO “arbitrage” — to raise equity capital for new CLOs diminishes. If this trend continues, issuance in 2025 may end up looking very similar to 2024.
Sources:
1,3J.P. Morgan – 2024 Leveraged Loan Annual Review; January 2025
2Bank of America – CLO Factbook; February 2025
4Bank of America – 2025 Year Ahead Outlook (CLO); 11/24/24
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.
