Jolted by ongoing uncertainty following the outbreak of the Iran war, the CLO primary market contracts
Nearly two months after the outbreak of the Iran war the CLO primary market continues to grapple with wider liabilities that show little sign of retreating to pre-war levels.
Spreads pushed out in the immediate aftermath of the war and, despite a few examples of week-on-week tightening in response to positive deescalation news, they remain elevated.
This is particularly true lower down the capital structure, as shown in the chart below, with triple and double-B notes staying at the wides posted throughout March.
Source: SCI data
Speaking to SCI, Savvas Charalambous, portfolio manager at Prytania Asset Management, notes that unlike the equities market, which has challenged expectations a number of times during this period, the credit market has been more predictable.
"Credit on the other hand appears to have been more reasonable or at least is moving in more expected ways. For example, the crossover [index] in Europe is wider and spreads overall are wider, however week on week we are actually a bit tighter which is entirely understandable due to the ceasefire announcement.”
Prior to the war, the global CLO market was only slightly lagging the record pace of 2025 according to SCI data, just 10% behind year-on-year for January and February in terms of deal flow, and 40% up on 2024 over the same period.
While the impact of the war on CLO issuance was felt globally, it was not evenly distributed with the US market showing marked signs of activity in the immediate aftermath, whereas the EU market saw issuance come to a standstill.
Overall, the US market has contracted 40% since the war broke out, whereas the European market saw a more severe 60% retreat, reflecting the impact of the European’s relative size and sensitivity to local geopolitical shocks compared to the US.
The refi/reset engine was purring in January and February this year with managers taking advantage of the tight spread environment to aggressively clean up 23/24 vintage deals. But since then this side of the market has collapsed with US resets dropping by half in the seven weeks either side of the outbreak of hostilities.
As spreads remain elevated, the economics of resets have become increasingly unattractive, prompting a shift towards refinancings in the US market. One investor tells SCI that he expects a wave of CLO refinancings as managers seek to shave costs off existing debt where possible, such as deals issued in high-spread environments of 2023.
This trend has yet to materialise in Europe, however, with just two refis since the war broke out, according to SCI data.
This geopolitical stress, paired with sector-driven credit deterioration has forced a fundamental reassessment of investment strategies for the remainder of the year. As the war keeps the floor on liabilities high, idiosyncratic risks in underlying portfolios are continuing to come to the surface, particularly in chemicals and software, making the market far more discerning than the momentum-driven environment seen in the last six months.
Giving his outlook on the CLO market, Charalambous advises caution at the top of the capital stack, while noting a potential opportunity for equity investors to profit from the dislocation in the market if they can pick the right deal.
“My view would be to position the portfolio conservatively and defensively as always, I don't think this is the right time to be adding long maturity debt risk, but this could be an excellent opportunity if you find the right deal to add long equity risk which means it has the ability to invest in this credit market and take advantage of that [volatility].”
While primary issuance remains stalled, heavy trading activity in the secondary market shows there is still robust competition for ‘clean’ assets, according to a market investor, indicating the market is not facing a total withdrawal of capital. Instead, liquidity is becoming increasingly concentrated in top-tier names as investors prioritise capital preservation over volatile sectors.