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Private credit CLOs bear brunt of software volatility

Hugh Minch, Managing Editor, Structured Finance Insights

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The CLO market has entered 2026 navigating a dual-fronted challenge: a deep software sector selloff and heightened geopolitical instability in the Middle East. The pincer has forced a tactical retreat among investors, driving material liability spread widening and a slowdown in primary issuance.

The widening bias is most acute in middle market CLOs. Many of these vehicles carry software exposures exceeding 30%, making them acutely exposed to sector-specific volatility.

Recent triple-A tranches have priced in the high 160s over SOFR — a 30 bps jump since January. Liquidity remains thin: secondary covers imply an additional 30 bps premium for certain triple-A profiles relative to primary.

Loan spreads, meanwhile, have held relatively firm. That divergence has tightened the arbitrage for CLO equity holders, compounding what was already a difficult 2025.

Managers are adapting. Deals originally scheduled as resets — which typically require fresh equity — are being restructured as refinancings. New issuance has slowed materially as equity tranches absorb compounding pressure.

The conventional wisdom that volatility creates opportunity persists. Managers are building par by acquiring discounted loans into warehouses, hoping to lock in improved returns once liability markets stabilize. 

Octus has identified 351 open warehouse vehicles in the U.S. and 183 in Europe — a clear signal that capital is positioned to move when the arbitrage reopens.

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