Veteran collateralized loan obligation (CLO) manager Octagon Credit Investors has seen its share of the credit market and broader economic challenges since its launch more than 30 years ago by a predecessor to J.P. Morgan. Managing $30 billion in assets, of which CLOs make up just under two thirds, the firm was acquired in 2016 by Conning Holdings, an asset manager specializing in servicing the insurance industry.
Conning announced its acquisition in July 2024 by Italy's Generali Group, one of the largest global integrated insurance companies.
"Generali has really given us access to seed capital and been the driving force of our expansion into direct lending," said Lauren Law, senior portfolio manager at Octagon who has been with the firm since 2004.
That has brought deeper relationships across the Street and collaboration among [Generali] affiliates, she added, plus access to Generali's firm-wide framework, governance standards and shared resources to accelerate adoption of artificial intelligence.
Octagon has completed four CLO transactions year-to-date, after eight resets and nine refinancings in 2025. In a recent interview with Asset Securitization Report (ASR), Law discussed the asset and liability issues faced by CLOs and what they indicate about the credit markets and broader economy.
The market really needs more of the private equity-driven M&A activity that's typically financed in our market.
ASR: What do you see as the top issue impacting CLOs today?
Law: Insufficient loan supply in the face of incredibly robust demand [from CLO investors] is the number one issue, a technical imbalance that has persisted for some time now. Besides a couple of periods of punctuated volatility, the vast majority of assets are trading near or even above par, and there's been incredibly active repricing. That's a challenge for CLO equity, given loans benefit from six-month soft-call protection, while [call protection for] CLO tranches is two years. As spreads move tighter [on the asset side], liabilities catch up, but there's a lag. The market really needs more of the private equity-driven M&A activity that's typically financed in our market.
ASR: Hasn't M&A picked up this year?
Law: Over the last two years, the increase in M&A has always been six months away. We came into 2025 with that expectation and promptly went into Liberation Day. The M&A process is long and it took a while to get back up and running, but we started getting M&A announcements at the end of last year and early this year. Buyout-related loans were completed for firms including Sealed Air, Electronic Arts and Hologic, and the outlook for 2026 was robust. Then the Iran conflict started in February, and the pipeline has dried up a bit since then. We're waiting for the next crop of M&A.
ASR: How has M&A activity affected CLOs?
Law: Demand has bid up loan prices to very high levels, enabling borrowers to refinance for lower coupons. That's a challenge for CLO arbitrage, which is pressured at least in the short-to-intermediate term, or until the CLO can refinance liabilities. That limits new CLO creation, and we saw that in March. We've seen a pickup since, but we're still running below 2025 levels.
ASR: Despite the arbitration challenge, there are reports of a significant surge this year in asset managers considering entering the CLO market for the first time. What draws them?
Law: That's been a long-term trend. Every year we see more investors participating in the asset class.
ASR: Are you seeing any new types of investors in CLOs?
Law: Probably an increase in the number of "steady hands," so to speak; deeper penetration within insurance and more participation from long-only asset managers, family offices, endowments and foundations. And the proliferation of retail [CLO ETFs] has introduced an entirely new type of investor.
The software sector is still seeing earnings growth and that's expected to continue through 2026.
ASR: How do you see the CLO market unfolding this year?
Law: It's hard to tell currently. But my baseline view outside technical factors like supply and demand is that probably the most important factor is the fundamental outlook. The economy is in relatively good shape, below-investment-grade companies are continuing to see revenue and earnings growth, their interest coverage is robust, leverage levels have not increased dramatically, and on average borrowers continue to show revenue and EBITDA growth. So from a fundamental standpoint we feel good about 2026.
In terms of new loan creation and what it means for spreads, it looks like 2026 will resemble 2025, with periods of volatility but continued demand for broadly syndicated, levered loans. As we get further into the year, we should see a pickup in M&A, absent broader disruption in the risk markets.
ASR: Does software obsolescence due to AI present such a risk?
Law: The issue is particularly acute for CLOs, given their significant exposure. Software companies represent about 13% of the BSL market, one of the largest sectors in CLO portfolios, and about 30% of those loans mature by 2028 or earlier, or 3% to 4% of portfolios. That said, not all software or even short-dated software loans will result in losses. The software sector is still seeing earnings growth and that's expected to continue through 2026. There will be dispersion in performance outcomes across different borrowers and sub-sectors. While a meaningful pocket of exposure, it is ultimately contained within the broader structure of CLO portfolios and we view the risk as manageable—albeit with a higher degree of uncertainty.
ASR: Could that result in a surge in liability management exercises (LMEs)?
Law: We're definitely going to see some of that. It's something the market will have to work through and, I think, can withstand. In some cases, transactions will be more constructive and heavily negotiated, such as amend-and-extend deals. In others, sponsor and borrower behavior may be more aggressive, particularly where equity value is impaired given the reset in valuations across segments of the software sector. It's not going to be quiet for the next few years.
ASR: Could a surge result in more aggressive LMEs, like a few years ago, where some CLOs lost a lot of value?
Law: LME activity has actually come down year over year. The software industry will experience some of this activity, but every situation will depend on factors such as the profile of the company, its forward trajectory, the equity value, the sponsor, and the lender within the deal.
In some cases, transactions will be more constructive and heavily negotiated, such as amend-and-extend deals.
ASR: What other sectors raise concerns, given higher prices for oil, natural gas and fertilizer?
Law: The CLO market doesn't have significant exposure to energy and agriculture. Probably the sector that keeps me up at night because it can be impacted in a number of ways by the Iran conflict is construction and building. Inputs such as plastic will be impacted by inflation during a period of weak demand that makes it harder to push prices higher. And it's uncertain what the interest-rate picture could mean for demand. Those factors keep demand weak both for new housing and existing home turnover, which drives the repair and remodel spend.
ASR: What percentage of the BSL market do those loans represent?
Law: I'd estimate less than 5%. That's manageable for CLOs, which survived the Great Financial Crisis because they are highly diversified and exposed to a broad section of the U.S. economy.
ASR: What's driving demand on the liability side?
Law: CLO tranches still represent attractive value relative to comparable asset classes, such as investment-grade and high-yield bonds. Plus, investing in AAA CLOs is an incredible way to get AAA exposure that's floating rate. A lot of investors got caught off-sides on duration in 2022 (when interest-rates rapidly rose), and I think people are still very cognizant of that.
