Portfolio Analytics Wrap: CLO Portfolio Fundamentals and Prices Diverge as Revenue Growth Declines and Net Leverage Increases in Q1

The fundamentals of leveraged loans held by CLOs deteriorated during the first quarter of 2025, despite the record-breaking spreads seen on both the asset and liability side of the CLO balance sheet during the first three months of the year.

Revenue growth in the CLO portfolio assets was 4.74% in the United States and 4.33% in Europe during the first quarter of 2025, down from 6% and 4.91%, respectively, in the fourth quarter of 2024. In the first quarter of 2024, revenue growth stood at 5.18% in the United States and 4.81% in Europe. For full-year 2024, revenue growth averaged 6.25% and 6.34% in the U.S. and European markets, respectively.

In the U.S., top performers on revenue growth, excluding middle market CLO managers and those with under $500 million in CLO assets under management, are Hayfin, RBC and Man Group. In Europe, standout managers on this metric were GoldenTree, Nassau and Bridgepoint.
 

Hayfin showed the highest asset-level revenue growth in the first quarter of 2025 at 8.54%, according to Octus’, formerly Reorg’s, Portfolio Analytics data. The manager’s revenue growth ranked 9th in the fourth quarter of 2024.

Bain Capital Credit ranks 10th for first-quarter revenue growth among U.S. CLO managers at 6.13%, compared with the market average of 4.74%. Stephanie Walsh, head of U.S. CLOs at Bain Capital, emphasized the importance of a diversified portfolio.

“We have some of the highest diversity scores in the market, as measured by Moody’s, so we tend to own more underlying obligors overall,” Walsh said. “We focus on diversified businesses that are well-positioned in the business cycle and trading underlying portfolios to mitigate credit risks.”

Bain has priced 10 deals with a global issuance volume of over $4 billion so far this year, including eight in the U.S. and two in Europe. The manager most recently reset two 2023 deals, Bain Capital Euro CLO 2023-1 and Bain Capital Credit 2023-1, via Jefferies in May.

Walsh added that Bain closely monitors the credits after the initial portfolio construction. “We also monitor the potential variation of outcomes and how stable the earnings have been for a company and in the space over time, as well as our expectations for how that will evolve going forward,” she said.

At the same time, she cautioned that revenue growth figures can sometimes be misleading. “A company could have strong revenue growth, but a significant increase in cost could potentially offset that high-level tailwind,” Walsh said. “One visible way to assess portfolio quality is to consider the price of the underlying assets, but you can also focus on profitability by looking at the EBITDA figures or free cash flow,” she added.

Partners Group ranks 5th among U.S. managers in revenue growth in the first quarter of 2025 at 6.96%, well above the market average of 4.74%. The portfolio also has the third-highest first lien net leverage at 4.5x. The manager priced four deals, including one new issue, in the U.S. and three deals in Europe so far this year.

The average first lien net leverage ratio across the U.S. CLO portfolios stood at 4.21x in the first quarter of 2025, compared with 4.19x in the fourth quarter of 2024, according to Portfolio Analytics data. In Europe, the ratio was 4.95x in the first quarter of 2025, up from 4.77x in the previous quarter.
 

Andrew Bellis, head of private credit at Partners Group, commented on the risks implied by CLO asset leverage ratios.

“We’re not looking to take undue risks within a CLO structure,” Bellis said. “Given its leverage, it doesn’t justify taking larger bets on discounted assets with high potential payoff. Rather, we look to slowly build par.”

Western, Fort Washington, and Whitebox had the lowest first lien net leverage ratios among the U.S. CLO managers in the first quarter of 2025. In Europe, the top performers on this metric are GoldenTree, RBC and Napier Park.

Muzinich, which ranks ninth among U.S. managers for first lien net leverage at 3.66x, has priced one new CLO and one reset in the U.S. so far in 2025. The firm is also currently planning its European debut with JPMorgan later this year, Octus previously reported. The manager focuses on higher-quality credit investment with a lower weighted average rating factor, underweighting lower-single-B assets while overweighting higher-single-B and double-B assets, according to portfolio manager Brian Yorke.

“We hold a preservation of capital style, and it gravitates to these companies that have analysts that were trained from a bottom-up perspective,” Yorke said. “Views on the sectors are not coming from a top-down view but more from the analyst doing a bottom-up review.”

Yorke noted that Muzinich avoids the energy sector and maintains an underweight in retail, consumer discretionary and consumer staples – segments typically characterized by lower interest coverage and slower revenue growth. Instead, he said, the firm sees stronger momentum in sectors such as media, telecom, cable, and financial services, with a slight overweight to utilities. It also expects growth in healthcare, particularly in hospitals and medical equipment businesses.

Alan George, managing director and head of structured products at Golub Capital, told Octus that leverage is an incomplete measure of risk.

“It’s very difficult to look solely at leverage as an indicator of risk,” George said. “You have to also look at other key metrics, such as the loan-to-value ratio, growth rate, revenue retention, liquidity and free cash flow. We are comfortable lending on a higher levered basis to companies with high enterprise value multiples, limited capital expenditures, and consistent and predictable growth in revenue.”

Golub Capital ranked 11th among U.S. managers in revenue growth in the first quarter of 2025 at 6.13%, compared with the market average of 4.74%. It is one of the most active managers in the U.S. market, with 12 deals amounting to a volume of $11 billion so far this year. The manager priced its most recent BSL CLO, Golub Capital Partners Static CLO 2025-1, in April.

George emphasized that a low leverage ratio alone doesn’t necessarily signal lower credit risk.

“Lower leverage does not automatically equate to lower risk, especially when you look at more cyclical industries like manufacturing, which have higher capex requirements and lower enterprise value multiples,” George said. “This is why all things matter when constructing a lending option around a given profile – interest coverage matters, customer retention rate matters, growth rate matters.”

“We as an institution focus on quality credits that have a good growth story and trajectory to them and gain comfort knowing that there is a private equity firm behind us,” he added.

Unlike revenue growth and leverage, interest coverage ratios at the asset level trended positively at the start of the year, averaging 2.97x in the United States and 2.92x in Europe during the first quarter of 2025, compared with 2.96x and 2.89x, respectively, in the fourth quarter of 2024. Among U.S. CLO managers, Steele Creek, Whitebox and Katayma recorded the highest asset-level interest coverage ratios in the first quarter of 2025, while Palmer Square, Capital Four and Brigade led their peers in Europe.
 

Muzinich ranked fourth among U.S. managers by the level of interest coverage in its loan portfolio, at 3.49x.

“We want companies that are larger and have very high interest coverage ratios, because we want companies that have deep liquidity,” Muzinich’s Yorke said, adding that a company’s liquidity is the foremost consideration when using interest coverage as a key performance indicator. “We tend to give up a little bit of spread and instead have a higher quality and a more stable portfolio.”

Yorke added that the primary reason companies end up in liability management exercises or restructurings is a lack of liquidity. “They have drawn on the revolver, gone into negative free cash flow, or gotten into a situation where they are no longer able to service their debt, or believe that their capital structure is no longer sustainable,” he said.

Yorke said that having a strong relationship with company management teams is paramount for managers.

“You believe in the management team and its depth and experience in navigating through challenging times but then being prudent on how they are managing their liquidity,” Yorke said. “Companies that seem to get themselves into problems are companies that take very opportunistic dividends or buy back shares in an aggressive way, maybe not at the right time in the cycle.”
 

Bain’s Stephanie Walsh said that the decline of fundamental metrics in the first-quarter 2025 data may reflect seasonality, particularly in sectors such as retail, where the bulk of cash flow is typically generated in the latter months of the calendar year. In addition, the first quarter also preceded the market volatility triggered by the April 2 tariff announcement.

“There was an expectation that there could be some level of tariff activity, so you could potentially see a pull forward in some company results and a pretty strong Q1 overall,” Walsh said. “There will be more potential volatility in Q2 if companies elect to pause ordering or defer capital expenditures based upon some of the uncertainty which presented itself with the tariff
announcement.”

As the second quarter unfolds amid rising policy uncertainty and shifting macro conditions, the CLO market is placing greater emphasis on credit fundamental resilience.

“Our focus will continue to be on earnings results and management commentary around expense control and cost pass-throughs,” said Noelle Sisco, managing director and portfolio strategist at Napier Park. “We view idiosyncratic risks as increasing both across and within sectors.”

As policy uncertainty persists, selectivity and disciplined underwriting remain essential to CLO managers navigating the remainder of the year.