In an investment landscape rattled by shifting geopolitical tides and a complex macroeconomic backdrop, collateralised loan obligations (CLOs) are once again commanding attention. With volatility rearing its head in traditional asset classes, and policy evolution unlocking new prospects in Europe, investors are taking a fresh look at the structural resilience and return potential of CLOs on both sides of the Atlantic.
AXA IM’s March 2025 CLO market update reveals a landscape defined by both caution and opportunity. On the global stage, early policy manoeuvres under the reinstated Trump administration have stirred short-term unease. Market reaction was swift: bond yields fell, equities wobbled, and investor sentiment rotated out of high-growth sectors. Yet, these jitters have had a paradoxical effect on CLOs, where shifting capital flows and strategic rebalancing have enhanced technical dynamics.
In Europe, Chancellor Friedrich Merz’s plans to reform Germany’s “debt brake” have fuelled optimism for greater fiscal flexibility and public investment. Simultaneously, expectations of a resolution to the Ukraine conflict are laying the groundwork for a re-energised European growth story. These developments have underpinned a rally in European leveraged loans, where robust CLO issuance has helped push the percentage of loans priced above par to the highest since 2018. Appetite for risk has broadened, with even triple-C rated loans outperforming higher-rated counterparts in February.
Across the Atlantic, sentiment in the U.S. loan market has been more fragile, pressured by tariff speculation and equity market volatility. The proportion of loans priced at or above par has dropped sharply. Still, net supply remains tight, and refinancing activity continues to dominate issuance. CLO managers are largely opting for risk reduction rather than aggressive par-building strategies, evidenced by declining CCC exposures in both U.S. and European portfolios.
Primary CLO markets are humming with activity. In the U.S., although new issuance is down 16% year-on-year, refinancings and resets are thriving. European issuance, in contrast, has surged by 122%, propelled by improving technicals and stronger investor demand. The CLO pipeline is gradually restoring balance between supply and demand, although pricing remains competitive, particularly in the AAA and BB tranches.
Investor enthusiasm has especially centred on CLO equity. With the excess spread at historical highs and cash-on-cash yields looking attractive, more are viewing CLO equity as a compelling complement to private equity—offering front-loaded, quarterly income in contrast to the back-end returns of traditional alternatives. The trend is evident both in the primary market, where tailored structuring enables optimal risk-reward positioning, and in secondary trades where strategic portfolio rotation is taking place.
Secondary market volumes have declined compared to the previous year, yet spreads are tightening. ETF inflows have provided ample liquidity, occasionally pushing secondary prices ahead of primary levels. Most debt tranches now trade at a premium, while equity demand remains solid, supported by low loan default rates and compelling return potential.
AXA IM’s strategy focuses on agility and precision. Mezzanine exposures are carefully curated to manage decompression risk, while carry and credit selection are prioritised in a flat curve environment. The team’s geographic diversification and selective primary/secondary market engagement are proving instrumental in navigating this complex, fast-evolving market.
AXA IM continues to regard CLOs as a critical strategic allocation for yield-seeking investors. Their structured nature, diversification benefits, and relative value appeal position them favourably amid market noise and economic transition. With active management and an eye on technicals, CLOs remain well-placed to deliver attractive risk-adjusted returns.
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.
