Credit Snapshot quarterly update with UBS Asset Management

Credit markets

• Amir Vardi · UBS Asset Management

  Triple-A CLOs at SOFR+120bp look attractive versus investment grade, with remote credit risk and no AAA defaults.

  Triple-A CLO debt yields about SOFR plus 120 basis points, with SOFR a little above 4%, so roughly 5.25% today. That spread compares well with investment grade corporates, whose overall spread is 85 basis points, where about half is triple-B and less than 1% is triple-A. No AAA CLO has defaulted since the 1990s, and the speaker finds a default scenario hard to imagine even for the worst CLOs in a severe downturn. He contrasts these with the 2008-era ABS CDOs built on subprime mortgages, which were highly correlated and written to non-creditworthy borrowers, while CLOs hold real businesses. Their floating-rate coupons reset with SOFR, so they avoid the price losses fixed-coupon bonds suffered as rates rose. He cautions that CLO triple-A ETFs are not cash substitutes because they lack a constant NAV and move with credit spreads. He concludes that the spread pickup, low credit risk and floating-rate structure explain strong demand for triple-A CLO ETFs, which hold nearly 90% of the roughly $60 billion of CLO ETF assets.

  “So getting a 120 basis points of spread on CLO triple a. To me, that seems very attractive.”at 6:14

• Amir Vardi · UBS Asset Management

  CLO equity is a buying opportunity; spread tightening is over and secondary prices look attractive.

  CLO equity has returned poorly for two years, which the speaker attributes to its own success. Strong historical returns drew heavy inflows from hedge funds, dedicated CLO equity funds, manager captive funds and global institutions. That demand created new CLOs, which bought leveraged loans and compressed loan spreads, since net new loan supply was not keeping pace. Lower spreads shrink the arbitrage between loan income and CLO liability costs. Because CLO equity is levered, that hit is magnified, and the present value of falling future cash flows lowered marks on existing equity. If spread tightening is behind us, as he believes, secondary CLO equity is attractively priced. Two years of negative returns have driven many buyers out, so third-party investors are sitting out a time he considers a good entry point. Net new loan supply and slower new CLO creation would help the asset class.

  “If one believes, as I do, that the spread tightening is behind us, then the current price of secondary equity is actually quite attractive.”at 11:26

• Amir Vardi · UBS Asset Management

  Broadly syndicated loan market poised to grow as it refinances private credit borrowers, widening CLO spreads.

  The broadly syndicated loan market has been very strong this year, making it the more obvious venue for incremental issuance. It can also refinance stronger private credit borrowers, which the speaker says is already happening. Together, new issuance and refinancings out of private credit should grow the market, which has been stuck at roughly $1.5 trillion for years. A CLO owns a portfolio of these loans, so more issuance should widen loan spreads. That would reverse the spread compression that hurt CLO equity. He draws this link after earlier 2026 headlines hit private credit over its software exposure. He calls the AI disruption risk to software questionable and debatable and declines to take a view on it.

  “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.”at 16:02