Messy rates and (S)Pain: CLO AAAs for the win

Research evidence excerpt

Messy rates and (S)Pain: CLO AAAs for the win

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CLO Weekly

Messy rates and (S)Pain: CLO AAAs for the

win

Market Overview 17 July 2026

CLO AAAs should get the cup: CLO AAA with high risk-adjusted return (YTD 2.7%, Securitized Products Strategy

42% since 2020), high liquidity and price stability as well as scalable size ($640bn) as Global

the largest AAA floater, remains our best asset to buy and best asset to sell pick.

Pratik K. Gupta

Rating policy changes & upgrades: Recent rating agency actions reflect the strong CLO/MBS Strategist

BofAS

long-term credit performance of CLOs, which have consistently exhibited lower +1 646 855 9146

impairment rates than corps and other structured products but traditionally pratik.gupta@bofa.com

conservatively rated. While criteria changes could drive additional upgrades in the Chris Flanagan

FI/MBS/CLO Strategist

backdrop of deterioration in collateral quality, we view them as a refinement of existing BofAS

methodologies rather than a return to pre-GFC rating standards. Bonds with (potential) +1christopher.flanagan@bofa.com646 855 6119

impairments are certainly a big outlier vs the rest of market as shown in Jr OC cushion. Victoria Xu

CLO/MBS Strategist

Potential Impacts: The recent changes by the NAIC make it more punitive for insurance BofAS

companies should a BBB go to BB status. We Expect more BBB spread tiering in CLOs +1victoria.xu@bofa.com646 855 6549

and insurance companies will likely prefer Fitch/Moody’s. Also, investors will not Akash Bhairav Gupta

necessarily accept CLO bonds with more leverage for the same rating. We think MVOCs MBS/CLO Strategist

will be the biggest constraint. It might make resets more palatable at the margin to get BofAS+1 646 855 7717

done from a rating agency model perspective.