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Egan-Jones Observes Sturdy CLO Credit Metrics Amid Rising Rates

Egan-Jones, a notable credit rating agency, recently unveiled its monthly report focusing on the collateralized loan obligation (CLO) market. In this report, it was observed that various credit metrics endured stable conditions even while interest rates and high-yield spreads experienced an upward trend in September. For investors navigating these financial waters, the report illustrates how these steady portfolio measures juxtapose with an increasingly tighter rate environment.

One significant finding outlined by Egan-Jones in its report is the weighted average rating score, which serves as a crucial indicator of default risk inherent in a deal’s underlying loans. A lower score signifies stronger creditworthiness, and Egan-Jones indicates that this metric has actually improved over the past year. Furthermore, the percentage of assets classified with a CCC+ rating or below, which represents the lower tier of loan ratings, has remained relatively unchanged or even decreased slightly, currently standing at a median of 6.1%. As of September 2026, Egan-Jones evaluated a total of 1,568 CLO deals, reflecting a comprehensive overview of the sector.

As financing conditions evolve, noteworthy shifts have been recorded. The 5-year Treasury yield surged by 60 basis points to close at 5.09%, marking it as the highest close recorded for the year 2026. Additionally, on September 16, the Federal Reserve enacted a 25 basis point rate increase, marking its first lift since 2023. During this period, high-yield spreads expanded to 312 basis points, escalating from their late-August low points. Concurrently, new CLO issuance shrank to 91 deals, totaling approximately $38.2 billion, which signifies a 12.5% decrease in deal count compared to the same period the previous year.

The analysis presented by Egan-Jones highlights the dual impact of rising interest rates on CLOs. While the coupons on the underlying loans increase, borrowing costs for borrowers do as well. This contradiction presents a complex scenario for investors, with the potential for rising loss severity on distressed exchanges and certain strategic defaults becoming apparent. Egan-Jones pinpointed software loans as a particularly weak segment within CLO portfolios, drawing attention to growing concerns over disruptions stemming from advancements in artificial intelligence.

Moreover, the agency juxtaposes its ratings with those from other credit rating institutions across 20 deals, ranking the tranches where opinion discrepancies are most significant. In this regard, Egan-Jones has been found to generally hold a more favorable view on CLO credit quality than many of its peers, indicating a potentially resilient outlook for investors. A detailed sample rating report on MP CLO VIII is also included in their findings, which highlights a significant industry exposure to high-tech industries at 15.9%.

In summary, Egan-Jones’ latest report paints a picture of a CLO market grappling with easing issuance and escalating borrowing costs, while the credit profiles of its rated portfolios maintain a steady course. Monitoring pressures stemming from software exposure and rising loss severity will be instrumental for investors aiming to accurately assess CLO risks as the interest rate cycle transitions. The insights provided by Egan-Jones serve not only as an evaluation of the current state of the CLO market but also as guidance for investors looking to navigate the challenges posed by the changing financial landscape.

About Egan-Jones Ratings

Founded in 1995, Egan-Jones Ratings is a Nationally Recognized Statistical Rating Organization (NRSRO) dedicated to delivering timely and precise credit ratings and proxy services, helping to guide investors in making informed financial decisions.