Un-break My Tranche: Global CLO Strategy

Research evidence excerpt

Un-break My Tranche: Global CLO Strategy

Global Idea

July 22, 2026 07:00 AM GMT

Morgan Stanley & Co. International plc+MGlobal CLO Strategy Vasundhara Goel

Strategist

Un-break My Tranche Vasundhara.Goel@morganstanley.comMorgan Stanley & Co. LLC +44 20 7677-0693

Joyce Jiang

We revisit our breakeven analysis to find the level of CDR StrategistJoyce.Jiang@morganstanley.com +1 212 761-0165

needed to break the lowest debt tranche. Findings suggest an Gabriel Reyes Esclasans

annual CDR of 2.7% for the median EU single-B and 4.2% for the Strategist

Gabriel.Reyes.Esclasans@morganstanley.com +1 212 761-4134

median US double-B, with headroom for some CLOs thinner, James Egan

supporting our cautious view on deep mezz. StrategistJames.F.Egan@MorganStanley.com +1 212 761-4715

Key Takeaways

Dispersion remains embedded in the CLO narrative, and to test the resilience of

the junior most debt tranches, we run our breakeven analysis across EU single-Bs

and US double-Bs.

We find the median breakeven annual CDR for EU single-Bs to be 2.7% and for US

double-Bs to be 4.2%, with the CDRs needed for the life of the deals.

We think EU CLOs with low junior OC cushion/low MVOC and a low BE CDR are

the ones to watch. These are CLOs in which past distress has eroded cushions

and the structural headroom to absorb further weakness is limited.

For US BSL CLOs, 22% of managers see both below-median BE CDR and above-

median software exposure. These cohorts are sensitive to an AI-disruption-driven

default cycle.

We continue to remain cautious on deep mezz in both EU and US CLOs as the

backdrop is delicate and dispersed. We prefer the senior tranches in both

markets.

The 2026 Extel Fixed Income Research Poll is in its final week. We are competing in

the US CLO and European CLO categories.