Chart to Watch: Have CLOs justified their credit ratings?
Global Head of Securitised Products John P Kerschner and Portfolio Managers Denis Struc and John Baumgardner discuss how collateralized loan obligations (CLOs) have consistently shown better credit strength than their corporate counterparts.
Source: Intex, Markit, S&P, Moody’s, Nomura, as of 31 May 2026. Defaults include those downgraded to D by S&P, those classified as impaired by Moody's (excluding certain tranches that paid in kind and were subsequently cured), and any tranches with less than full original principal repaid upon deal redemption. Past performance does not predict future results.
Even though skepticism remains around the credit ratings on CLOs following the Global Financial Crisis (GFC), CLOs were not at the center of the crisis. Faulty sub-prime mortgages that were packaged into collateralized debt obligations (CDOs) – an entirely different investment – was the main culprit. Investment-grade (IG) CLOs held up well through the GFC, with zero defaults in 2008 and 2009 and just a 0.12% default rate in BBB CLOs in 2010. Post GFC, IG CLOs have continued to show superior credit strength to corporate bonds and have been further bolstered by stricter lending requirements and greater credit enhancement within CLO structures.
- Despite investor skepticism regarding the trustworthiness of the ratings on securitized products, historical default rates on CLOs are significantly lower than on similar-rated corporate bonds, with zero defaults in AAA through A tranches and a 0.1% BBB default rate on CLO deals originated between 2012 and 2018.*
- Floating-rate bond exposure remains an essential component of a diversified fixed income allocation, with CLOs being our preferred investment vehicle due to their strong credit ratings, structural protections, and historical resilience.
- Exposure to investment-grade tranches of CLOs – where structural protections are at their highest – remains our favored approach. Investors in BB and B CLO tranches may face more direct risks, as a negative turn in credit markets could drive tranche rating downgrades and spread repricing further down the capital stack.
IMPORTANT INFORMATION
Collateralized Loan Obligations (CLOs) are debt securities issued in different tranches, with varying degrees of risk, and backed by an underlying portfolio consisting primarily of below investment grade corporate loans. The return of principal is not guaranteed, and prices may decline if payments are not made timely or credit strength weakens. CLOs are subject to liquidity risk, interest rate risk, credit risk, call risk and the risk of default of the underlying assets.
Securitized products, such as mortgage- and asset-backed securities, are more sensitive to interest rate changes, have extension and prepayment risk, and are subject to more credit, valuation and liquidity risk than other fixed-income securities.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
*According to Nomura.
Credit quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest).
Volatility measures risk using the dispersion of returns for a given investment.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
Marketing Communication.
Important information
Please read the following important information regarding funds related to this article.
- An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital. If this happens or the market perceives this may happen, the value of the bond will fall.
- When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
- While high yield (non-investment grade) bonds generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
- Asset-Backed Securities (ABS) and other forms of securitised investments may be subject to greater credit / default, liquidity, interest rate and prepayment and extension risks, compared to other investments such as government or corporate issued bonds and this may negatively impact the realised return on investment in the securities.
- Some bonds (callable bonds) allow their issuers the right to repay capital early or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the Fund may be impacted.
- High exposure to a particular country or geographical region carries a higher level of risk than a more broadly diversified portfolio.
- Derivatives may be used to help achieve the investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets.
- Some or all of the ongoing charges and other costs of the Fund may be taken from capital, which may erode capital or reduce potential for capital growth.
- In addition to income, this share class may distribute realised and unrealised capital gains and original capital invested. Fees, charges and expenses are also deducted from capital. Both factors may result in capital erosion and reduced potential for capital growth. Investors should also note that distributions of this nature may be treated (and taxable) as income depending on local tax legislation.
- Losses could be incurred if a counterparty became unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.