Private credit Why CLO Equities - Macroeconomics and credit cycle considerations

Ian Gilbertson
Jeffrey Reemer
and
February 10, 2026

Transcript

Jeff Reemer

As we look towards 2026, consensus expectations are for continued rate cuts. How do you think CLO equity will behave in a declining rate environment?

Ian Gilbertson

I'm glad you asked, Jeff, because this is a question that we get a lot from potential investors.

The concern is understandable; leverage loans are floating rate assets.

And the fear is that declines in interest rates could affect the base rates of these vehicles typically so far in the US or Euribor in Europe. And that could lead to those lower quarterly distributions we discussed.

However, CLO equity is unique within the CLO structure because it’s essentially quasi fixed rate. Distributions are driven by the difference between the spreads on loan assets and the spreads on debt liabilities, both of which are floating rate but tied most of the time to the same benchmark.

So while there may be short-term fluctuations, quarter to quarter rate movements alone up or down typically do not cause large shifts in distributions. In fact, in low-rate environments, the median annual distributions of 13.6% in the US and 15% in Europe may appear even more attractive relative to the broader fixed income universe.

Jeff Reemer

In the current macroeconomic environment, what are the key factors driving CLO equity performance?

Ian Gilbertson

Throughout 2025, the market has been really focused on defaults and credit losses, a trend that began in 2023 when we saw an uptick in interest rates.

This year, investors initially had to digest tariff impact, and the implication that could have on loan portfolios, but has shifted their attention to some notable defaults within the private credit space.

Currently, annualized loan default rate, including distressed exchanges, is about 3.3% in the US loan market. So partnering with a manager that has a strong track record of credit selection, and a proven platform is critical. Importantly, the debt market tends to reward these tier one managers by accepting lower financing costs on their debt liabilities, which can further enhance the cash flows that get generated to CLO equity investors.

As we look ahead to 2026 and the potential for declining interest rates, many investors are considering how CLO equity may perform in such an environment. While lower rates raise questions about distribution levels—given that leveraged loans and CLO liabilities typically reset with market benchmarks—CLO equity often behaves more like a quasi‑fixed‑rate investment. That’s because distributions are largely determined by the spread between loan asset yields and debt costs, which tend to move in parallel, helping to keep income relatively steady.

In this discussion, Ian Gilbertson, Co‑Head of US CLOs, underscores the importance of strong credit selection and active management as market conditions evolve, including recent default patterns and the effects of tariffs. He also notes that working with experienced managers could provide access to attractive financing terms and may contribute to maintaining strong returns for CLO equity investors, despite changes in the broader macroeconomic environment.

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