Following 2025's strong if not record year, the collateral loan obligation (CLO) market in the U.S. is anticipated to break new issuance records in 2026, bolstered in part by increasing M&A fueled by leveraged debt.
In its recent outlook report, BofA Securities projects a record $600 billion in 2026 issuance, comprising $195 billion in new issuance split between $155 billion in CLOs investing in broadly syndicated loans (BSL) and $40 billion in private credit (PC), as well as $275 billion in resets and $130 billion in refinancings.
"We think the first half of 2026 would be focused on refi/resets and new issue [volume] will accelerate in the second half," BofA Securities says, noting that 260 loan warehouse facilities are currently outstanding.
The bank estimates approximately $450 billion in BSL and $80 billion in PC of refi/reset eligible deals at current spread and market value over-collateralization levels. Even if spreads widen by 20 basis points, it sees $400 billion of refi/reset eligible deals. It says dealers' and the rating agencies' capacity constraints could diminish issuance, and reset volume is contingent on sufficient equity capital injections to cover past losses.
We think the first half of 2026 would be focused on refi/resets and new issue [volume] will accelerate in the second half.
Most asset managers highlighted in their 3Q earnings the anticipation of more M&A activity, according to BofA Securities, prompting it to project $470 billion in leveraged loan issuance.
There should also be strong investor demand for CLOs, said Tracy Chen, portfolio manager and head of global structured credit investing at Brandywine Global, who noted CLO BB spreads range between 400 bps and 650 bps compared to 200 bps for comparatively rated high-yield bonds. She added that more leveraged lending stemming from M&A should further widen leveraged loan spreads and improve arbitrage for CLO equity.
BSL liability spreads should remain near current levels for the foreseeable future, according to KBRA, with AAA spreads having settled in the mid-130 bps range, and BBB spreads just above 300bps, receding upwards of 50 bps from their post-Liberation Day jump. Private credit spreads have also tightened, KBRA says, adding, "There could be a case for further tightening next year based on a more accommodative financing environment generally, as well as increased demand for floating-rate products that still offer attractive all-in rates."
A resilient market
A Moody's Ratings November 20 report foresees CLO collateral defaults declining in 2026, even as competition between BSL and PC increases credit risk in an already borrower-friendly market. The rating agency notes the defaults of Tricolor Holdings and First Brands Group loans present in many CLOs and how they "demonstrate the potential perils of off-balance-sheet finance and hidden leverage," a risk mitigated by CLO portfolios of typically 200 to 300 loans that blunt the impact.
There's some bifurcation of the underlying credit performance, by sector and also by credit quality.
"This highlighted to me the resilience of the CLO market, which didn't see any material spread response (to the defaults)," Chen said.
She added, however, sectors including chemicals, automobiles and construction have been impacted by the trade war and are facing credit challenges nevertheless. And there is credit risk within CLO tranches, with the highest parts of the capital structure seeing more upgrades than downgrades, while 10% of BBs have been downgraded and just 1% upgraded, and 20% of single B bonds downgraded and 1% upgraded.
"The pace of CCC downgrades remains very significant," Chen said, adding, "So there's some bifurcation of the underlying credit performance, by sector and also by credit quality."
Default risk toned down
BofA Securities projects 2025 defaults at 4.2%, comprising 1.5% in payment defaults and the rest liability management exercises (LMEs), and overall defaults in 2026 at 3.7%. It is maintaining a watchlist of CCC names in the chemical and auto sectors as well as companies facing artificial-intelligence risk.
"These sectors have underperformed meaningfully over the past six months and we see material CCC downgrade risk, if not default/LME risk," BofA Securities says.
You'll see liabilities tighten, and the combination will cause even more CLO issuance into next year.
The overall drop in defaults is premised on Federal Reserve rate cuts—most recently December 10 and at least two more anticipated next year—that should significantly benefit leveraged credits and the CLOs that invest in them. For one, said Himani Trivedi, head of structured credit at Nuveen, stressed levered companies facing potential default due to the high cost of financing will see borrowing costs decline, increasing their cashflow and reducing their probability of default.
More broadly, cheaper financing will lead to more M&A and LBO activity. The resulting surge in new loan supply would help marginally widen spreads on the asset side of CLO balance sheets, Trivedi said, while the high volume of resets that kept supply elevated should start to subside after the first half of next year.
"After that, you'll see liabilities tighten, and the combination will cause even more CLO issuance into next year," Trivedi said.
Next year will test whether trading in the CLO market becomes increasingly more electronic, following other asset classes. Octaura's Loan trading is now around 6% of the secondary market. Howard Cohen, head of markets at Octaura, said a dovish environment, business-friendly conditions and the emergence of new CLO managers often focused on incorporating technology into their processes, in areas such as electronic trading, sentiment scoring and bid-wanted-in-competition (BWIC) optimization, will lead to increased issuance.
In 2026, Cohen said, Octaura anticipates launching several new trading protocols, including one enabling dealers to send out their own assets to clients and for buyside clients a sweep process protocol, another to trade entire portfolios, and a new analytics product focused on increasing transparency.
