CLO equity creation has slowed since March, but there are opportunities to buy loans at a discount in the current market, according to KKR’s heads of leveraged credit.

“Since the conflict in the Middle East began, CLO equity creation has slowed massively in Europe and resets are currently very difficult or impossible to do,” said Eddie O’Neill, co-head of global leveraged credit at KKR.

CLO equity returns have fallen over the last few months, with market sources seeing new issues offering equity returns in the high single digits. At the Creditflux CLO Symposium in April, some third-party equity investors blamed this on the rise of captive CLO equity funds, while others believe it is simply a response to the current market dynamic.

Jeremiah Lane, who is also a portfolio manager of KKR’s leveraged credit funds and portfolios, told Creditflux that dispersion is the key story of 2026 so far. The year began with a lot of momentum, with a lot of issuance taking place until the software selloff began in February. The US and Israel war on Iran added a macro layer in March, with new issues dropping off globally.

“Even with the recovery, the impact across the CLO stack was uneven,” said Lane. “Triple A tranches were relatively stable and only modestly wider on the quarter, while double Bs moved meaningfully and stayed there, ending well off their tights and down over 3%. We saw a lot of dispersion in outcomes.” 

According to Lane, a substantial portion of the double B market traded below par on a market value coverage basis, while the rest ranged widely from the 500s to the 900s. That represents “a very different setup” from what had been witnessed over the past year, where everything tended to move together. 

“That dispersion is really the story now,” he added.

Lane noted that this was a credit-driven repricing, which has resulted in a “more differentiated opportunity set within CLO tranche investing.”  At the same time, the technical backdrop remains tight, with liability costs widening by around 20bps, and the arb remaining “constrained, albeit still workable.” This has been reflected in the more measured pace of new issues, he added. 

“Put it all together and you have a market where the top of the stack has largely held in. The mezzanine tranches have absorbed more of the volatility, and dispersion is doing more of the work,” said Lane. “That tends to be a better environment for being selective and leaning into relative value rather than relying on the market to do the heavy lifting.” 

Notwithstanding this, O’Neill pointed out that historically, there is little correlation between day-one equity arb and the ultimate return on a CLO, given there is usually an option to reset deals after 18 months if the cost of financing has gone against you. 

“The real opportunity sets tend to come when you can buy loans at a discount,” O’Neill added. “The Covid-era CLOs, the 2022-vintage CLOs certainly in Europe – even though cost of financing was wide at 250bps or above, you were buying a portfolio at 94. Those were very attractive deals. At the time, people thought double B, single B was more attractive, but actually equity ended up being more attractive, because you were called out of your double Bs and single Bs, but the equity was able to continue to run.”