Overall collateralized loan obligation (CLO) issuance through January 2025 lagged behind issuance over the same period last year, although S&P Global Ratings foresees this year's overall volume setting new records.
Broadly syndicated loan (BSL) and middle market (MM) CLOs will total $205 billion in 2025, modestly more than last year's $201.95 billion, according to S&P Global's U.S BSL CLO and Leveraged Finance Quarterly published February 13.
The rating agency notes that CLO issuance set records last year, and "we expect another busy year in 2025 amidst robust investor demand for floating-rate assets in an uncertain interest rate environment," the report says.
S&P Global tallied $7.38 billion in BSL CLOs this January, compared to $10.74 in January 2024, while MM CLOs totaled $2.54 billion, up from last year's $1.79 billion. Volume overall in 2024 was split between $163.45 billion in BSL CLOs and $38.50 in MM CLOs.
Extremely tight spreads prompted a spree of refinancings and resets at the start of 2025, with more than $31.52 billion in January of this year compared to less than $5.14 billion last year. S&P Global noted that at the start of 2024, a benchmark CLO with a five-year investment period and two-year non-call period priced around SOFR plus 160 basis points, a level that dropped to SOFR plus 130 by the end of the year, and less than SOFR plus 115 in January.
"Given this, we expect a record volume of CLO resets and refinancings this year, at $353 billion compared to $306.94 billion in 2024," the report says.
Despite record issuance in 2024, the overall size of the CLO market changed little because CLO new issuance was matched by a large volume of existing-CLO redemptions and amortizations of vintage senior tranche balances.
"One thing we'll be keeping an eye on is whether mergers and acquisitions and leveraged buyouts increase, potentially leading to new loan supply that could grow the CLO market," S&P Global says.
Good news for CLO BSL investors is positive momentum for speculative-grade corporate ratings, S&P Global says, with the size of CCC baskets trending downwards because fewer obligors are seeing their ratings lowered to CCC, and in some cases issuers' ratings are falling below the CCC level. In such situations, MM CLOs may step in to purchase the riskier loans.
"Anecdotally, we're hearing that investors are pushing CLO managers to maintain cleaner, lower spread portfolios, while investors who want more spread can look at middle-market CLOs," S&P Global says.
In terms of CLO ratings, S&P Global's 2025 outlook is stable based on improving credit fundamentals of corporate loan issuers and a relatively benign default outlook. It anticipates any downgrades that do occur to be on junior tranches of pre-Covid-19 CLOs.
