CLO Refinancing Plans Put On Ice in Europe as Funding Costs Rise
(Bloomberg) — As the war in the Middle East drives up the cost of CLO funding, some European managers are shelving their refinancing plans — a move that may complicate efforts by the region’s riskiest borrowers to roll over their debt.
Issuers including Alcentra, Five Arrows, Onex Credit Partners, and Napier Park Global Capital have all withdrawn refinancing plans in recent weeks as a plunge in leveraged loan prices makes cleaning up portfolios more expensive, while wider market spreads drive up the price of CLO liabilities. Only four refinancing and reset deals launched in March, down from 21 the previous month and an average of 16 over the past three quarters. Meanwhile managers continue to churn out new issue CLOs, which are currently more cost-effective.
Check here all cleansing notices for European CLOs
The average cost of capital — or the spread CLOs pay to investors — has been creeping up over the past quarter, rising in March to just over 200 basis points from 186 at the start of 2026, according to data compiled by Bloomberg. That’s undermined the case for refinancing some of these vehicles, particularly those printed in periods when spreads were lower.
The increase in borrowing costs threatens to derail what was supposed to be a busy year for the market. Bank analysts had forecast high levels of refinancing and reset activity in 2026, with expectations of more than €50 billion ($57.5 billion) of issuance. A recent BNP Paribas report notes that roughly €40 billion of this stems from 2021-vintage CLOs exiting their reinvestment periods by year-end, compelling managers to take decisive action.
With refinancing looking less viable for that pipeline of 2021-vintage deals, many of these vehicles will instead choose to wind down. The liquidation of these older portfolios could drive down prices for riskier, out-of-favor corporate loans. For borrowers already in precarious positions — particularly those with looming debt maturities — these asset sales may make it even harder to refinance.
The CLO portfolio managers, on the other hand, will be judged on how they manage this phase. Ultimately, that may lead to greater differentiation around pricing and investors demanding higher compensation from riskier managers. The liquidation of these assets to comply with portfolio constraints also creates an opportunity: as these aging vehicles offload assets they generate a steady supply of discounted loans for managers building fresh portfolios.
A significant portion of these older vehicles have high exposure to the riskiest loans, according to David Nochimowski, BNP’s global head of CLO and ABS strategy.
“A lot of these deals exiting the reinvestment period will amortize fast because a growing portion of them are in breach of their triple-C tests,” he said. As these aging vehicles offload assets to manage compliance, they generate a steady supply of discounted loans for managers building fresh portfolios. “This in turn could provide technical support to the market.”
Arbitrage Squeeze
CLOs, the biggest buyers of leveraged loans, finance their asset purchases through the issuance of bonds of varying risk and reward, and pocket the difference. This so-called arbitrage has historically ranged between 150-250 basis points, excluding periods of high volatility.
However, over the past 18 months, wave after wave of loan refinancing ate into managers’ asset yields. By February, this squeezed the arbitrage to its narrowest point since March 2020, according to Bloomberg Intelligence.
Since then, however, the dynamic has abruptly shifted. Rising concerns around AI-driven business model disruptions, surging energy costs, and the ongoing conflict in the Middle East have injected fresh volatility into the leveraged loan market. This macro anxiety has effectively paused opportunistic refinancing and widened average spreads for new issue loans.
It’s also triggered a two-point drop in secondary loan prices after a prolonged period last year in which they remained elevated. This selloff has benefited managers amassing collateral, making it significantly more profitable to issue new CLOs today than it was earlier in the year.
Against this backdrop, the CLO market has kept functioning, albeit with a clear divide. Eleven new-issue vehicles were printed in March, in line with the monthly average of the past twelve months, according to data compiled by Bloomberg.
“The cost of cleaning up a portfolio could mean that some reset deals are put on hold,” said Tarun Buxani, portfolio manager at CLO investor Alegra Capital. “Primary continues to churn as long as there is demand for the largest and most senior-rated class of CLO notes.”
Starting a new CLO allows managers to build a portfolio from the ground up by purchasing quality assets at current secondary market discounts. In contrast, a manager refinancing an existing CLO must raise capital against a seasoned pool of loans and convince wary investors of that specific portfolio’s quality.
While the relatively low prices of leveraged loans are helping managers rotate their existing portfolio toward pockets of value, that does involve selling some paper to create space for others, potentially crystallizing losses.
As such managers have to convince investors that they are making the right bets, and this will be reflected in the pricing levels of their liabilities.
The next wave of deals that come to market will indicate whether investors are starting to price managers’ performance differently.
As of today, market valuations of the existing CLO portfolios in Europe have come down somewhat, but only in a few quarters will it be possible to evaluate the performance of these pools.
“If the war continues and there are energy cost and supply issues in Europe, that will challenge even the ‘clean’ portfolios being constructed today,” said Buxani.
©2026 Bloomberg L.P.
