#United States #New York #Egan-Jones Ratings #Credit Quality #CLO Issuance

Egan-Jones Analysis: The State of the CLO Market

In a recent report published on October 1, 2026, Egan-Jones Ratings, a well-established credit ratings firm, analyzed the current state of the collateralized loan obligation (CLO) market. The report highlights a noteworthy decline in new CLO issuances, revealing that the number of deals has decreased sharply from previous years. In August 2026, there were only 98 CLO deals totaling approximately $40.5 billion, down from 124 deals and $53.5 billion in August 2025. This represents a significant decline of 21% in the count of deals and 24% in total volume, emphasizing how this market segment has contracted over time.

Despite the slowdown in new CLO issuances, Egan-Jones assures that the credit quality of existing deals remains stable. Analysts attribute this deceleration not to a deterioration in loan quality but rather to diminished returns for CLO equity investors. The returns have been compressed due to tighter loan spreads and limited new supply of broadly syndicated loans, which critically impacts the returns accessible to CLO equity, typically the most junior claims in the capital structure of these financial instruments.

Interestingly, broader credit conditions remain favorable, with the ICE BofA US High Yield Index option-adjusted spread averaging around 270 basis points during August. This figure indicates that investor demands for yield on riskier corporate debt are close to three-year lows, a stark contrast to the higher demand seen in April 2025 when the spread reached 461 basis points.

Egan-Jones' assessment included reviewing numerous transactions within the market. As of August 2026, the firm reported ratings across 1,613 CLO transactions they had analyzed, noting a slight decline in the weighted average rating score. However, this trend can be interpreted positively, suggesting a lower estimated default risk. The share of assets rated CCC+ or lower remained stable or even showed slight improvement, and both the weighted average asset and tranche coupons experienced a dip.

In its outlook, Egan-Jones presents a more optimistic perspective on CLO credit quality compared to competing rating agencies. Their methodology employs a conservative approach, applying default probabilities that the firm believes are more cautious than industry norms, and continuously updating cash flow models and ratings each month as new trustee reports become available.

From the insights provided in Egan-Jones' review, there is a clear distinction between the slowdown in new deal formation and the health of the loans that are already present in the market. While the supply of new CLO transactions remains thin, the credit quality of existing collateral holds steady. This situation reflects more on the financial dynamics of creating new transactions than it does on the actual performance of loans currently in circulation.

Overall, Egan-Jones emphasizes the necessity for investors to recognize that the dip in CLO issuance does not equate to a weakening of existing loans, which may offer strategic opportunities depending on the shifting landscape of credit investments. As the market continues to navigate through these changes, stakeholders are encouraged to remain vigilant and informed, leveraging industry insights to make well-founded financial decisions.