CLO Risk Could Define the Next Credit Cycle

“The most dangerous risk is the one investors stop questioning because markets look calm.”

Collateralized loan obligations (CLOs) were designed to distribute risk — not eliminate it.

Today, that distinction matters more than ever.

As private credit markets have grown, CLO issuance has surged alongside looser underwriting standards and increased reliance on non-institutional borrowers.

On paper, everything still works. In practice, rising interest rates and shrinking margins are pressuring borrowers who were never built to absorb sustained economic stress.

The current environment feels familiar: asset prices remain elevated while operating fundamentals quietly deteriorate.

When cash flow tightens, CLO structures depend heavily on assumptions that may not hold — especially if defaults begin clustering instead of arriving in isolation.

What makes CLO risk particularly dangerous is timing.

These instruments often look stable until they don’t.

Payment waterfalls, tranche protections, and rating assumptions can mask underlying credit decay — right up until stress reaches a tipping point.

Private equity’s growing exposure to private credit adds another layer of systemic risk. Many firms have leaned heavily into these structures to generate yield in a low-return world.

If defaults rise meaningfully, the pressure won’t stay contained.

We’ve seen this movie before.

Different instruments.

Same psychology.

If you want to decode with me how CLOs are structured, the risk signals worth paying attention to, and why 2026 could be a critical year, then grab your cup and have a Coffee with Bill in this episode of Debt Doctor.

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Catch you in my next insights,

 – Bill Bymel, Debt Doctor

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