SFA Research Corner: CLO Update—From Uncertainty to Thriving, But Mind the Zombies

CLO upgrades have outnumbered downgrades since the beginning of the year and thanks to an abundance of liquidity, the CLO exposure to defaulted leveraged loan collateral is now below pre-pandemic levels. Strong fundamentals and a search for yield has encouraged investor appetite for CLOs, easily absorbing this year’s new issue supply, which is on track to best 2019’s record year. As the leveraged loan pipeline continues to build, we anticipate a vigorous new CLO market for the near-term. One caveat to the rosy CLO outlook going forward is the potentially negative impact that newly created zombie firms will have on CLOs with exposure to them.