Falling Borrowing Costs Fuel CLOs' 2026 Buyout Bet

CLO Market Revival: A 2026 Outlook

CLO managers are increasingly confident in a 2026 revival of leveraged buyouts, driven by falling borrowing costs and a resurgence in M&A activity. JPMorgan analysts forecast that M&A and LBO volume could double, reaching $80 billion in high-yield bonds and $225 billion in loans. The Federal Reserve's rate cuts have spurred demand for cheap funding, with banks underwriting $65 billion of buyout-related debt for next year.

High-profile deals, such as Electronic Arts' $55 billion buyout and Blackstone and TPG's $18.3 billion acquisition of Hologic, are expected to boost the leveraged loan market in 2026. These transactions will bring billions to the debt markets, supporting CLO managers who are betting on a strong year. The Trump administration's expected regulatory easing is also seen as a catalyst for deal-making.

Despite optimism, CLO managers face challenges, including tight spreads and a mismatch between supply and demand in the leveraged loan market. Refinancing activity has cut into investor profits as companies prioritize repricing existing debt over taking on new loans. Morgan Stanley reports that potential profits from bundling loans into bonds are the slimmest in about a year.

Why the Standoff Happened

CLO managers are navigating a complex landscape shaped by recent market dynamics. The stagnation in M&A activity over the past few years led companies to refinance existing debt rather than take out new loans for buyouts. This trend reduced returns for investors even as investment firms pushed CLO issuance to record levels. The result is a market where returns are compressed, and spreads have tightened.

The Federal Reserve's decision to resume rate cuts in the second half of 2025 has driven demand for leveraged financing. As borrowing costs fell, companies began to refinance older, more expensive debt and prepare for new deals. This shift has led to a surge in leveraged buyout activity and a renewed focus on CLOs as a source of capital. Some managers view this as a temporary lull in returns, with the potential for stronger performance in 2026 as the market stabilizes.

What Analysts Are Watching

Market participants are closely monitoring several factors that could influence the CLO and leveraged loan markets in 2026. Analysts from major banks, including JPMorgan and Morgan Stanley, are watching for signs of regulatory changes under the Trump administration. Easing of regulations could provide a tailwind for deal-making and potentially reverse some of the spread tightening seen in recent months.

AI-related investments are also a key focus, with leveraged financing expected to support around $150 billion in data center spending over the next five years. However, analysts warn that AI investment is a mixed bag, with potential threats to certain industries. Price discovery and sector-specific risks will be important for investors as they assess the impact of AI-driven growth.

Risks to the Outlook

While the outlook for 2026 appears optimistic, there are risks that could disrupt the momentum. If spreads in the new-issue loan market continue to tighten and the M&A pipeline under-delivers, the CLO market could face another repricing wave. This would threaten the profitability of CLO arbitrage and further compress returns for investors.

Global trade tensions and potential disruptions, such as a new round of tariffs, could also dampen M&A activity. Some conference attendees have expressed concerns that such events could turn off the M&A spigot and lead to a market correction. The current surge in leveraged financing is partly driven by expectations of future deals, so any slowdown in the M&A pipeline could have a ripple effect across the credit markets.