Credit Snapshot quarterly update with UBS Asset Management
Per the full note from UBS Asset Management's Credit Snapshot Q3 update , Portfolio Manager and Head of Structured Credit Amir Vardi and Head of U.S. Client Portfolio Management Eileen Liu make the case that CLOs — particularly the equity tranches — remain the most interesting pocket of the non-investment-grade credit landscape, with the group's pedigree in the asset class stretching back to its first CLO launch in 1998. The desk's supporting evidence is structural rather than macro: a CLO is framed as a fund-like vehicle holding 200-plus senior secured leveraged loans to below-investment-grade corporates, diversified across industries, with the bulk of those loans used by private equity sponsors for LBOs of large profitable companies. There is no specific data print or central-bank pivot cited in the excerpt — the argument is one of asset-class positioning within broader credit rather than a directional currency call, and no FX pair is named anywhere in the discussion. With no internal coverage data on relevant currencies and no high-impact events on the calendar in the next 30 days, this piece functions as a credit-allocation color note for the desk rather than a tradeable macro signal.
What the desk is arguing
The desk's thesis, as framed in the UBS Asset Management Credit Snapshot Q3 update , is that CLOs — and specifically their equity tranches — continue to offer the most compelling positioning within the broader non-investment-grade credit landscape, and that this warrants dedicated allocation rather than a generic high-yield proxy.
The supporting evidence is the structure of the vehicle itself rather than a particular data print: Vardi describes a CLO as functionally similar to a fund owning 200 or more senior secured leveraged loans to below-investment-grade corporates across a wide range of industries, often originated by private equity sponsors to finance LBOs of large profitable companies. The group's credibility rests on longevity — UBS Asset Management's Credit Investments Group has managed broadly syndicated loans, high-yield bonds and CLOs since the late 1990s and launched its first CLO in 1998, making it one of the original managers in the space.
The alternative read the note implicitly rejects is that CLO equity is simply a levered bet on default rates and spread direction that belongs in the same bucket as generic high-yield; instead the desk frames it as a structurally diversified, actively managed asset class whose market dynamics have evolved materially since the late-1990s vintage.
How other firms see it
No per-firm FX forecasts are attached to this commentary and no currency pair is named in the source, so there is no aligned-versus-contrary split to map onto the desk's view — the note is a credit-allocation piece, not a directional call.
The intersecting instruments to watch are broader credit and rates channels rather than a specific pair: investment-grade versus high-yield spreads, the leveraged-loan index, and the CLO new-issue calendar all transmit the same signal the desk is describing, and any widening in loan spreads or deterioration in LBO financing conditions would be the first place this thesis shows stress.
What the calendar says
No high-impact events sit on the calendar in the next 30 days for the relevant jurisdiction, so there is no scheduled catalyst to cross-reference — the desk's positioning view has to stand on the structural argument rather than an event-driven trade.
Key takeaways
01UBS Asset Management's Credit Investments Group argues CLOs — and especially CLO equity tranches — remain the most interesting pocket of the non-investment-grade credit landscape in the Q3 update [source].
02The desk's structural case: a single CLO holds 200-plus senior secured leveraged loans to below-investment-grade corporates across industries, often LBO financing originated by private equity sponsors.
03Pedigree is part of the pitch — the group has managed broadly syndicated loans, high-yield and CLOs since the late 1990s and launched its first CLO in 1998.
04No FX pair or currency forecast is named in the commentary; treat this as credit-allocation color, not a directional macro signal.
Market implications
Watch the leveraged-loan index and CLO new-issue volumes as the transmission channel — any widening in loan spreads or slowdown in CLO formation is the first tell that the desk's equity-tranche thesis is under pressure. With no high-impact events in the next 30 days, positioning should be judged against spread levels rather than calendar catalysts.
Risks to this view
What invalidates the call is a sustained widening in leveraged-loan spreads or a default cycle in below-investment-grade corporates that compresses CLO equity distributions — neither is in the excerpt's base case, but both would force a reversal. A stall in LBO financing conditions or a breakdown in CLO new-issue supply would also undercut the structural argument the desk is making.
ubs
We are back now with the Credit Snapshot with our partners from UBS Asset Management, joining us for today's update from the UBS Asset Management Credit Investments Group for the Q3 update, glad to be joined today by Amir Vardi, Portfolio Manager and Head of Structured Credit, and Amir is joined by Eileen Liu, Head of U.S. Client Portfolio Management. So with that, Eileen will be guiding today's conversation with Amir, focusing on why CLOs continue to be an interesting asset class and how it fits into the broader credit landscape.
So Eileen, Amir, I'll now turn it over to you. Thank you, Dan, and thank you for having our team on again for the Quarterly Credit Snapshot. As a quick refresher for our listeners, our team, the Credit Investments Group, we've been managing non-investment grade credit, so that's broadly syndicated loans, high-yield bonds, CLOs, since the late 1990s.
We were one of the first CLO managers in the space, launching our first CLO in 1998, but the markets have certainly evolved. We are continuing to see interesting market dynamics for bonds, CLOs, and definitely the equity tranches of CLOs. So I do have Amir on with us today, and I'm hoping, actually, Amir, if we can actually just set the stage for our audience, can you give us all a very quick, maybe a quick CLO 101?
Sure. Yeah, happy to be on and speak to everyone, and happy to do a CLO 101. The quick part is sometimes challenging.
I'll do my best. So I like to think of a CLO as similar to a fund, which invests in a diversified portfolio of senior secured corporate loans. We also call those leveraged loans.
These are loans to companies, corporates, with below-investment-grade ratings. Usually or oftentimes, at least, these loans are used by private equity sponsors to do an LBO of a large profitable company. One CLO would own 200 or more of these types of loans, of these loans to 200-plus different companies across a whole range of industries.
But unlike a mutual fund or a managed account, other types of funds, a CLO raises its money not from one class of investors that all have the same exposure to that portfolio, but instead the CLO issues multiple layers, people call it tranches, of securities with different levels of risk, and therefore different levels of potential return. There are broadly debt tranches, with AAA being the safest, and there is an equity tranche. The debt tranches are backed or secured by the loan portfolio, and it is safer than the equity.
The equity sits at the bottom of the CLO's capital structure, and effectively it is using those debt tranches as a way to add leverage to buy a senior loan portfolio, and that's how you can get double-digit returns on CLO equity. Even though the loans themselves, if you just bought the loans unlevered or directly, you'd have something in the mid-high single digits type of yield these days. A CLO is not an evergreen fund.
It has a finite life. It's typically, from the date of issuance, five years of reinvestment period, so that's the period where the asset management company, who is the manager of that CLO, can trade the portfolio. They'll replace loans that get repaid, but they're essentially actively managed five years.
After five years, the CLO begins to amortize, so loans are repaid by the company, they're sold, and so overall the expected life is around seven to eight years for one single CLO. Thank you for that, Amir. I know it's always hard to do it very quickly.
Okay, so let's move on from beyond just the CLO structure maybe to CLO – different ways to access CLOs and maybe CLO-related funds, or funds that invest in CLOs, excuse me. We've seen a growth in CLO funds, especially ETFs, with a large number and asset base of ETFs investing in CLO debt, really from AAA down to BBs, and U.S. CLO AUM crossed $50 billion mid-year of this year, and it's seen about $17.5 to $18 billion of inflows through the third quarter.
Why do you think we've seen such high demand for CLO ETFs of late? Yes, so you're right, it's crossed $50 billion. It's actually closing in.
It might even be already at $60 billion. I'd have to go hit refresh somewhere. It's very close to $60 billion.
Nearly 90% of that is in AAA-rated CLOs, so while you're right that there are some that are focused on BBs, AAAs, and so forth, almost all of it is AAA-rated CLOs. Those have – so I'll focus my kind of response to your question on AAA-rated CLOs. CLOs currently have a yield of around SOFR plus 120 basis points, with SOFR a touch above 4% today.
That's about five and a quarter percent. Some people think of these as a cash substitute. That's not quite right, so while the credit risk is very low, these are not money market funds.
They don't have a constant NAV of one, so there are some price fluctuations, but they're small. It depends on credit spread movements, meaning that 120, if it goes higher, the price will go down a little bit. If it goes lower, the price will go up a little bit.
So the reasons to answer your question, the reasons for the demand, probably the number one thing, that's a nice spread pickup, that 120 basis points I referenced. That's a nice spread pickup over risk-free rates. It compares really well to other AAA-rated or other low-risk options, just as an example, the investment-grade corporate market, which is massive.
The overall spread on investment-grade corporates is 85 basis points today. By the way, about half of the investment-grade market is BBB-rated, and almost none of it, less than 1%, is AAA-rated, so getting 120 basis points of spread on CELO AAA, to me, that seems very attractive. Number two, there is data going back to the 1990s, and no AAA CELO has ever had a default.
And even looking forward, it is really difficult to imagine the scenario that even the worst-performing CELOs in a very draconian scenario would have a default. So it took some time for the market to appreciate that. Even today, there's folks that get confused with comparing CELOs to things like ABS CDOs, CDO squared, synthetic CDOs.
These are all the things that essentially brought us into the GFC in 2008. Those CDOs had highly correlated assets inside of them. What people kind of got confused, thousands of line items, mortgages specifically, but these were subprime mortgages, were written to non-credit-worthy borrowers, that's the word subprime, secured by houses in the U.S., which was in a housing bubble, not to mention the various fraud and other issues related to the underwriting of those mortgages.
So CELOs, very different, these are real businesses, real companies. Reason number three, I could keep going, but I'm going to stop at three, CELOs are floating rates. So I mentioned before SOFR plus.
So if rates go up, as they've been doing recently, and although probably not today, expected in an hour, we'll find out, probably flat, but generally speaking, the direction of travel is for rates to be going up as central banks are trying to tame inflation. Your coupon goes up, so every quarter your SOFR base rate is updated. If you own fixed income securities, like treasuries or investment grade, it's right there in the name, fixed income securities, that means fixed coupon.
So if rates go up, your price goes down, and so in a rising rate environment, this can be pretty painful, as we've seen this year, as we saw even more starkly in 2022. So in short, if I had to kind of put all those three together, risk-remote, credit-risk-remote, floating rate product, you can earn over 1% over risk-free rates. I think why we've seen such a big inflow into these products.
Thanks, Samir. I do wonder, if we gave you more time, how many more reasons you'd have, because I do think there's quite a number of reasons, but those three are really helpful. At least three more, but let's not go there.
Okay. I'll keep this moving. So AAAs, you know, a lot of interest in AAAs.
What about CELO equity, though? So, you know, there's been a lot of discussion about CELO equity. Is CELO equity at an inflection point right now?
The asset class just really hasn't performed as well in recent quarters. Can you explain why that is, and really, where do we go from there? Yes.
It has not performed well. That would be an understatement. CELO equity has not had a good total return the last couple of years.
I find it fascinating, and so I'll try to explain what's happening there. In some ways, it has been a victim of its own success. So historically, CELO equity has performed as expected, and actually some vintages, like 2006 and 2007, quite a lot better than expected, which does surprise people.
But double-digit IRRs consistently, and so that strong historical performance led to significant interest in CELO equity and a lot of money that got kind of crowded into the trade. dedicated CELO equity funds, CELO managers via what's called captive funds, various global institutional investors, everyone's kind of chasing this asset class. And what that does is when CELO equity is purchased, that means that new CELOs are created. You're creating a new CELO, and what that really is doing effectively is creating demand for these leveraged loans.
And in the absence of net new supply of loans, this can lead to spread tightening. So a loan that paid, say, S plus 400, they can come back and refinance themselves down to S plus 325. If you extrapolate that to the entire market or to an entire CELO portfolio, that loss of spread leads to a diminished, what people call arbitrage, which is just the difference between that loan spread and your cost of capital, and the cost of capital is the weighted average liability spread.
So that gets magnified for CELO equity because they have this implied leverage of the CELO, and those securities get priced by investors at the present value of future cash flows at some discount rate, let's say 12%. So the current day mark, or what someone would pay for an existing, already outstanding CELO equity security, it's impacted in a magnified way as future cash flows decline, which they have with that spread compression. So it's a bit counterintuitive, I think, but the strength of the market led to inflows, which didn't just reduce future IRRs, which it did, but it didn't just do that, it actually lowered the marks of existing CELO equity as that spread compression got manifested over the last two years or so.
If one believes, as I do, that the spread tightening is behind us, then the current price of secondary equity is actually quite attractive, and it's a great entry point for those brave enough to invest. This is amplified by the fact that with two years of consecutive negative returns while other asset classes have risen in value, the number of those people brave enough has diminished as people are licking their wounds, exiting the market, and rather than buying in now, at a time that I believe is attractive, these third-party CELO equity investors, they're hiding under rocks. And I believe forward returns at today's levels is attractive.
What would help, and hopefully we get this, is net new loan supply, which would increase those spreads as opposed to decrease them. And then the other thing that would help is slower new-issue CELO creation, so basically less demand because of less creation of new deals. Thank you.
That's very helpful to hear. So, you know, this discussion really, you know, isn't so much focused on loan supplying demand, broadly syndicated loan supplying demand. I know how it's really related to CELOs, but I would like to just take a minute to talk about private credit, because it continues to be in the news, and, you know, there are private credit CELOs, while our discussion today was focused on BSL CELOs.
How do you think recent trends in private credit and market sentiment affect CELOs more broadly? Yes, and actually this question kind of ties into that last question I was just talking But let me just take a step back first, because I think to frame the two markets is maybe helpful to what I'm about to get to. So private credit is really not a very different asset class to leveraged loans, or what you just called BSL, broadly syndicated loans.
Essentially the same thing. The main distinction is that private credit firms, they disintermediate the arranging banks. And in the old days, instead of calling it private credit direct lending, we used to call it middle market lending, because the size of those loans were smaller.
And the smaller loans were essentially outside of the scope of what traditional banking players would care about. And so there became these smaller direct lenders that came to lend to those unbanked companies. But now with the last 10 years or so of growth in middle market, they've raised so much AOM, we've rebranded it from middle market to private credit.
And even a company that has to issue a multi-billion dollar bank loan, or loan, does not necessarily need to go hire JP Morgan to syndicate that loan. Instead, they can go straight and place it straight to one or maybe a small club of these private credit asset managers. It's still the case that the very big loans, a high single digit billion, 10 billion plus, they still are too big.
So they would have to syndicate, they'd have to hire the JP Morgan and others to syndicate that out. So this has a few advantages, this private credit loan versus the syndicated loan, has a few advantages. So one is no rating required.
That means that the loan can be more highly levered, for the same reason the loan can have more unique features, like the ability to HIC, P-I-K, which means paying kind. And since these loans are originated, and to be held to maturity, there's no trading of the loans. It's really not the point.
And then there's no market price for them, and really many people view that as a feature, not a bug, of that market. So in 2022, when the BSL market got somewhat dislocated, prices declined, after Russia's invasion of Ukraine, along with the high inflation resulting in increases in rates, the private credit market was there and it was available to companies, and so a lot of issuance went over there. This year, earlier in 2026, we got some negative headlines about private credit, really related to their exposure to software, which is quite high, and that some people thought these software companies could be disrupted by these rapidly advancing AI models, PBD on that front.
That's questionable, debatable, not for us to talk about today. But meanwhile, this year, the BSL market has been very strong, and so it's the more obvious place for companies to come with incremental issuance, new issuance, and as well, the BSL market is at the ready, and this is happening. They're able to refinance the stronger performing companies that are currently in the private credit market.
So the market's actually poised to grow again. It has stagnated in size in recent years, kind of one and a half trillion, but really hasn't grown. So anyway, it took me a while to get to, what does that mean for CLOs?
Well, a CLO owns a portfolio of broadly syndicated loans. So if we get more issuance, both brand new issuance, because our market is holding in better or refinancing loans out of private credit, that could lead to an increase in spread, it should lead to an increase in spread. And that would reverse that trend I talked about before about CLO equity, where spreads collapsed.
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