CLO Market Update February 2025
A turbulent start to the year has done little to slow the momentum of the CLO market. While geopolitical tensions, shifting monetary policies, and macroeconomic volatility create uncertainty, structured credit continues to attract investor interest. With spreads tightening and demand for leveraged loans growing, the outlook for CLOs remains promising despite near-term headwinds.
The Federal Reserve’s decision to maintain rates in January, following a hawkish stance from Chair Powell, delayed expectations for monetary easing until 2026. In contrast, the European Central Bank implemented a widely anticipated 25-basis-point rate cut, highlighting the divergence in policy trajectories between the US and Europe. Market participants are now adjusting to these dynamics, weighing the impact of differing economic growth forecasts and inflationary pressures.
The new US administration has moved swiftly on trade policy, with tariff increases on Canada, Mexico, and China, alongside potential measures targeting European goods. While these shifts introduce volatility, they also create opportunities for nimble investors seeking value in the structured credit space.
The US leveraged loan market saw a surge in secondary prices and primary issuance, with January recording a total of $212 billion in activity, including $138 billion in refinancing. M&A-driven borrowing has increased, balancing out some of the yield compression stemming from repricing activity. Meanwhile, European leveraged loans experienced strong demand, particularly for higher-risk assets, with the European Leveraged Loan Index returning +0.99% for the month.
CLO primary markets started the year at a measured pace, as anticipated. US CLO issuance totalled $10 billion across 18 new deals, while refinancing and reset activity remained robust. European issuance volumes rose sharply, reflecting a 125% increase compared to January 2024. Lower AAA spreads contributed to tightening in funding costs, benefiting new issue deals over legacy transactions.
In secondary markets, both US and European CLOs experienced tightening spreads and rising trading volumes. European CLO BWIC supply reached €723 million, reflecting heightened investor demand, while the US market recorded $15.1 billion in total trading. Investors remained active across the capital structure, with particular strength in sub-investment-grade tranches. This trend underscores confidence in structured credit, even as macroeconomic conditions evolve.
For investors, US CLOs continue to provide attractive returns, outperforming traditional credit instruments. European CLOs currently offer slightly wider spreads, though expectations of further ECB rate cuts could introduce additional risks. Market volatility—driven by geopolitical events and economic policy shifts—creates tactical entry points for active managers. As ETF inflows influence market liquidity, selective profit-taking in secondary markets remains a key strategy.
CLO equity investments also saw meaningful activity, with heightened distributions and strong demand for reinvestment opportunities. January equity distributions averaged 4.2% in Europe, with vintages from 2020 and 2021 performing particularly well. Looking ahead, the ability to time CLO execution and warehouse investments will remain a core focus for maximizing returns.
Despite ongoing macroeconomic shifts, structured credit markets are poised for continued strength. CLOs have historically provided resilient performance, and 2025 presents both challenges and opportunities for investors prepared to navigate the evolving landscape.
Volta Finance Ltd (LON:VTA) is a closed-ended limited liability company registered in Guernsey. Volta’s investment objectives are to seek to preserve capital across the credit cycle and to provide a stable stream of income to its Shareholders through dividends that it expects to distribute on a quarterly basis.
