Global CLO investors prefer US risk, but European senior bonds offer more compelling relative value
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Global CLO investors prefer US risk, but European senior bonds offer more compelling relative value
Morgan Stanley's June CLO tracker shows that tight spreads and diverging asset performance have increased the importance of manager selection, deal structure, software exposure, and spread compensation in private credit CLOs.
- Investors are overall more positive on the macro and fundamental backdrop for US CLOs, but under tight valuations they place greater emphasis on bottom-up manager and deal-level selection.
- Sentiment on private credit CLOs is more cautious, with many investors believing PC AAA needs at least about 40bp of spread compensation versus BSL AAA, and some viewing about 150bp as the practical lower bound for meaningful participation.
- European CLOs are less favored than US CLOs on fundamentals, but senior bonds such as European AAA/AA are more attractive due to relative value and potential support from insurance demand.
- In May, new US CLO issuance was about $16.8bn, while refi/reset activity totaled about $39.0bn, showing that spread tightening provided a window for managers to restart refinancing and resets.
Report interpretation
Overview
This report is based on Morgan Stanley's discussions with CLO investors on both sides of the Atlantic and tracks views on the global CLO market in June 2026, issuance and refinancing activity, secondary trading liquidity, CLO equity performance, and collateral quality. The core conclusion is that investors have greater confidence in US CLO fundamentals, but tight spreads, AI-related sector disruptions, and credit divergence make manager capability, deal structure, software exposure, and relative value the key determinants of allocation.
Core views
First, manager selection remains the primary variable in CLO investing, with investors favoring managers that have long track records, experience across multiple credit cycles, lower software exposure, and AI risk assessment frameworks. Second, private credit CLOs are not a homogeneous asset class; financing-oriented deals, managers with stronger control, and lower-middle-market borrowers are viewed more favorably, while the upper-middle market is treated more cautiously because covenant and documentation protections have weakened. Third, US CLOs have structural advantages in market depth, manager coverage, and issuer diversity; while European CLOs face greater macro risk, relative value and technical demand are better for senior bonds. Fourth, issuance and refi/reset activity rebounded notably in May, reflecting that spread tightening reopened the deal window.
Analysis framework
The report combines investor interviews, primary CLO issuance and refi/reset data, TRACE and BWIC secondary trading volumes, CLO equity NAV, leveraged loan indices, the share of collateral priced below 90, and cross-currency hedging costs to compare the US, Europe, BSL CLOs, and PC CLOs on a cross-sectional basis.
Methodology notes
Measures the state of the CLO market through issuance, refinancing, resets, secondary liquidity, and collateral quality.
This framework uses monthly market data and investor feedback to assess CLO supply and demand, valuations, structural risks, and allocation preferences.
Compares the attractiveness of US and European CLOs in terms of fundamentals, structural advantages, macro risks, and senior spread levels.
Investors prefer US fundamentals, but European AAA/AA senior bonds are drawing attention because of relative value and potential insurance demand.
Screens CLOs through manager track record, deal structure, software exposure, AI risk framework, borrower size, and covenant protection.
In an environment of tight spreads and increasing collateral divergence, portfolio-level alpha matters more than broad market beta.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- US CLOFundamentally preferred asset
- Strengths
- Greater market depth, broader manager universe, and a more diversified issuer base, with clear structural advantages.
- Weaknesses
- Higher exposure to software and AI-related disruptions, while tight valuations limit the attractiveness of new allocations.
- Comparison
- More favored by fundamental investors than Europe.
- Risks
- Divergence in sector and issuer performance, software-related credit pressure, and overly tight spreads.
- European CLO senior bondsRelative value opportunity
- Strengths
- Highly rated tranches such as AAA/AA are more attractively valued than in the US and may be supported by Solvency 2-related insurance demand.
- Weaknesses
- European macro growth is weaker and more sensitive to energy shocks.
- Comparison
- Fundamentals are weaker than in the US, but relative value is better in higher-rated tranches.
- Risks
- European macro downside, energy price shocks, and insufficient valuation compensation in the lower part of the capital structure.
- Private credit CLOHighly selective allocation asset
- Strengths
- Some financing-oriented deals, lower-middle-market borrowers, and managers with stronger control can offer better protection and recovery prospects.
- Weaknesses
- Issues of complexity, limited liquidity, valuation uncertainty, and weaker documentation protections are more pronounced.
- Comparison
- Requires additional spread compensation relative to BSL CLOs, and investors generally believe current compensation is insufficient.
- Risks
- Rising PC defaults, weaker covenants in the upper-middle market, negative news around direct lending and BDCs, and software-related risks.
- BSL CLOBenchmark for private credit CLO comparison
- Strengths
- Relatively higher market transparency and liquidity, serving as the benchmark for assessing spread compensation in PC CLOs.
- Weaknesses
- Also faces maturity-wall risk and credit divergence among AI-related borrowers.
- Comparison
- Risks are more transparent than in PC CLOs, so the required additional compensation is lower.
- Risks
- Default rates could rise to about 5.5% by mid-2027, with widening divergence in collateral quality.
Key data
- US new CLO issuance in May35 deals, totaling $16.8bnRebounded from the April low.
- US refi/reset in May43 refis totaling $16.9bn; 44 resets totaling $22.1bnCombined refi/reset volume was about $39bn, the strongest month of the year.
- European new CLO issuance in May14 deals, totaling €5.7bnThere were also 5 refis totaling €1.8bn and 5 resets totaling €2.4bn during the same period.
- US year-to-date new issuance in 2026148 deals, totaling $70.0bn, down 17.2% year over yearCompared with $84.5bn in the same period of 2025.
- European year-to-date new issuance in 202659 deals, totaling €24.8bn, down 0.1% year over yearEssentially flat versus the same period of 2025.
- Required spread compensation for PC AAAAt least about 40bp, with some investors citing about 150bp as the participation floorIntended to compensate for greater complexity, lower liquidity, and valuation uncertainty relative to BSL CLOs.
- Expected default ratesBy mid-2027 about 5.5% for BSL and about 8% for PCAI-related names face pressure from a near-term maturity wall.
- TRACE IG trading volume$23.5bn, up 2.2% month over monthAbove the 24-month average of $15.8bn.
- TRACE BIG trading volume$5.0bn, down 2.1% month over monthAbove the 24-month average of $4.1bn.
- US BWIC trading volume$5.9bn, up 20.5% month over monthAbove the 24-month average of $5.2bn.
- Median US BSL CLO equity NAV43.3%, down 0.1% month over monthAs of end-May 2026.
- Median European BSL CLO equity NAV44.7%, up 3.5% month over monthAs of end-May 2026.
- Share of US CLO 2.0 collateral below 9010.0%, up about 2bpAs of end-May.
- Share of European CLO collateral below 9010.0%, down 0.38 percentage pointsAs of end-May.
Impact & implications
For investors, the current environment is not suitable for simply chasing market beta. Allocation focus should shift toward manager quality, sector exposure in collateral, deal control rights, covenant protection, and position in the capital structure. US CLOs are better suited as the core risk exposure for those with a fundamental preference, European senior bonds can serve as a relative value opportunity, and private credit CLOs require greater spread compensation and stricter deal selection.
Risks
- Tight spreads may continue to leave risk compensation insufficient.
- AI disruption and software sector exposure may intensify divergence in collateral performance.
- Europe is more sensitive to energy shocks, and its growth outlook and structural challenges remain a drag.
- Private credit CLOs face risks from liquidity, valuation transparency, covenant protection, and weaker document quality.
- Weaker borrower protections in the upper-middle market could depress recovery rates under stress scenarios.
- Morgan Stanley discloses that it may have business relationships with companies or instruments covered in the research, so investors should treat this report as one input into decision-making rather than the sole basis.
What to watch
- Whether the spread of PC AAA versus BSL AAA widens to about 40bp or more.
- Whether relative value divergence continues between US and European AAA/AA senior CLO spreads.
- Whether the refi/reset window after May can be sustained and whether new issuance continues to recover.
- The maturity wall, defaults, and rating migration of software- and AI-related borrowers.
- Whether TRACE and BWIC trading volumes remain above 24-month averages, indicating resilient secondary liquidity.
- Changes in US and European BSL CLO equity NAVs and the share of collateral below 90.
- Whether Solvency 2 rule changes bring incremental demand for high-rated European CLOs.