As we look ahead to 2026, the financial markets stand on the brink of a transformation driven by high-quality collateral, evolving credit structures, and supportive economic policies. Borrowers and lenders alike are seeking reassurance that loan portfolios will remain stable and resilient, even as the cycle turns.
The collateralized loan obligation (CLO) market remains a cornerstone of structured finance. In 2025, new-issue CLO volume soared to a record $184.6 billion, fueled by robust M&A activity, sustained corporate spending on artificial intelligence, and three Fed rate cuts. As 2026 unfolds, issuance is on track to match or surpass those levels, with managers repricing an estimated $315.7 billion of legacy deals.
Triple-A CLO spreads are projected to widen modestly to 135 basis points over SOFR by year-end, up from 125 basis points in November 2025, while double-B tranches may reach 590 basis points. These moves reflect a cautious market, balancing abundant liquidity against emerging labor market softening and inflation drags.
Collateral scarcity concerns have eased thanks to a North American M&A deal volume of $2.4 trillion in 2025—the second-highest annual total on record. This surge translated into nearly $450 billion of leveraged loan issuance, creating a deep pool of collateral for new CLOs and refinancings. As managers deploy distributions into discounted loans, they are capturing attractive arbitrage opportunities without compromising credit quality.
Commercial banks enter 2026 with a balanced outlook. After a period of tightening lending standards through Q4 2025, institutions anticipate stronger demand for commercial and industrial (C&I) loans across all firm sizes. Rate declines, stable Treasury yields, and anticipated M&A-driven spending underpin this optimism.
Notably, 95.5% of the value of "acceptable" risk C&I loans remains secured by collateral, underscoring the sector’s commitment to strong credit fundamentals. Despite caution in underwriting, banks have maintained or even increased lending to commercial real estate, driven by maturing loan maturities and thinner bid-ask spreads as rate volatility subsides.
Non-depository financial institutions (NDFIs) now represent more than 10% of total bank lending, exceeding $1.1 trillion in commitments. With conservative loan-to-value metrics, diversified pools, and short durations, these loans have experienced lower loss rates than direct private credit, reinforcing the sector’s reputation for disciplined underwriting.
Private credit has grown from niche to mainstream, ballooning by 50% between 2020 and 2025 to reach $3 trillion. With projections placing the market at $5 trillion by 2029, competition among direct lenders, banks, and institutional investors has never been fiercer.
Banks have adapted by partnering with private equity firms and REITs, offering hybrid structures that deliver 9–11% returns on loan-on-loan financing, compared to 6.5% from traditional corporate lending. Public pension funds committed $3.3 billion, or 21% of their debt allocations, to private credit vehicles by mid-2025, reflecting growing confidence in secured, floating-rate strategies.
Across leveraged finance, LBO and M&A activity in technology and healthcare are driving issuance. Collateral loan-backed structures continue to benefit from ample CLO arbitrage, enabling borrowers to refinance high-coupon deals at attractive spreads. This cycle’s tailwinds—rate cuts, robust liquidity, and diversified funding sources—point to a robust borrowing environment in 2026.
Collateral structures extend beyond CLOs and bank loans. As technology advances, digital assets and securities finance are reshaping collateral conventions, offering new forms of pledge and rehypothecation. Regulatory frameworks are also evolving, with supervisors reassuring that AAA-rated CLO tranches structured as loans will continue to receive favorable capital treatment.
While the outlook is constructive, market participants remain vigilant. Key headwinds include spread widening, covenant leniency, and intensifying private credit competition. Macroeconomic risks, particularly around inflation and labor markets, could pressure credit performance.
However, several factors underpin enduring collateral confidence:
Beyond quantitative metrics, the heightened collateral diversification across geographies, industries, and asset classes has given market participants an intangible but powerful asset: peace of mind. Borrowers benefit from wider access to capital at attractive terms, while lenders gain assurance that losses will be contained even in stress scenarios.
In 2026, the convergence of supportive monetary policy, strong corporate activity, and evolving credit structures will foster a truly resilient environment for secured lending. Collateral-rich financing vehicles—led by CLOs, bank loans, and private credit—offer borrowers and lenders a foundation of stability.
Data-driven insights show declining default rates, ample arbitrage opportunities, and robust institutional participation. Regulators have reaffirmed the capital treatment of senior tranches, and emerging collateral forms continue to expand the toolkit. All of these developments point to a future where borrowers and lenders alike enjoy peace of mind as they navigate complex markets with confidence and clarity.
References
