The European CLO Market at a Crossroads

Last week, I attended Bloomberg’s fourth annual CLO Summit in London. The conversation was more measured than the headlines have been suggesting.

2025 was a record year for new issuance, resets, and refinancings. Investor demand was strong across the capital stack, and CLOs continued to function as the largest buyer of leveraged loans in Europe. The structure held up, even with geopolitical noise running in the background.

The market outlook presentation forecast around 55 billion euros of new issue volume for 2026, with roughly 40 billion in resets and refis. That remains broadly intact. Triple As were expected to leak out to around 128 basis points over Euribor by year-end. Markets entered 2026 with strong momentum, yet conditions have shifted more than once since then. We saw a sharp sell-off in software loans through February, driven by uncertainty about AI’s impact on the sector, followed by a change in tone as geopolitical developments moved to the foreground. That’s three distinct market environments in three months.

The two big stories at the summit were software loans and Solvency II.

On software, panellists noted that secondary prices for software loans fell sharply from January, as investors tried to work out which borrowers were genuinely exposed to AI disruption and which were not. Pressure showed up in double B and single B CLO note prices and OC test levels. One panellist reckons that roughly 17 to 18 percent of European CLO collateral pools carry software exposure - higher than the 7 to 8 percent figure you get using agency sector classifications alone. Some managers trimmed the sector, but not by much. The question now is less about immediate stress and more about refinancing risk as software maturities approach.

On regulation, panellists discussed the Solvency II changes taking effect from January 2027. Insurers should be able to invest in senior, qualifying CLO tranches, particularly AAA notes, on materially lower capital charges. Insurance money is expected to become a more significant investor base going forward. Panellists also flagged possible changes to UCITS concentration limits, which could support further development of the European CLO ETF market, still far smaller than the US market.

On the investment outlook, panellists were selective. Triple As remain attractive on a risk-adjusted basis, particularly ahead of the regulatory tailwind. Triple Bs at 340 to 370 basis points in primary are offering higher nominal spread than high yield - which has widened to around 310 - without the same idiosyncratic default risk. One panellist argued there is still opportunity across the capital stack for investors willing to build their own data-driven view rather than trade on market heuristics.

The mood was broadly constructive, but contingent. A lot has to hold together - the arbitrage, the loan market, the geopolitical backdrop - for 2026 to deliver on its early promise.

The closing point was simple: CLOs work. The structure has been tested across multiple cycles. The arbitrage will continue to be the variable that managers and investors need to watch most carefully in the near term.

The word of the day? Software. And that doesn’t look likely to change anytime soon.

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