CLO Default Rates: Historical Analysis 1994-2025
Understanding default rates is foundational to evaluating CLO risk. While CLO tranches have never experienced an AAA default, the underlying leveraged loan portfolios do experience periodic defaults—typically 1-10% annually depending on the credit cycle. This page provides comprehensive default rate data and analysis of how defaults flow through the CLO structure.
Key Concepts: Defaults vs. Losses
Critical Distinction
Default ≠ Total Loss. When a leveraged loan defaults, lenders typically recover 70-80 cents on the dollar through bankruptcy proceedings or asset sales. A 3% default rate with 75% recovery = 0.75% net loss rate to the CLO portfolio.
The Loss Calculation
Net Loss Rate = Default Rate × (1 - Recovery Rate)
Example:
- Portfolio: $500M in loans
- Annual defaults: 3% = $15M
- Recovery rate: 75% = $11.25M recovered
- Net loss: $15M - $11.25M = $3.75M (0.75% of portfolio)
This 0.75% loss is absorbed first by equity (8-12% of capital structure), then BB (4-6%), then BBB (5-7%), and so on. AAA (60-65% of structure) has 35-40% subordination protecting it, meaning losses would need to exceed 35-40% of the portfolio before AAA is impaired—a scenario that has never occurred.
Leveraged Loan Default Rates by Year
| Year | Default Rate | Recovery Rate | Net Loss Rate | Macro Context |
|---|---|---|---|---|
| 2000 | 3.2% | 72% | 0.90% | Dotcom bubble peak |
| 2001 | 5.7% | 68% | 1.82% | Dotcom crash; telecom stress |
| 2002 | 6.4% | 65% | 2.24% | Post-9/11 recession |
| 2003 | 4.1% | 70% | 1.23% | Recovery begins |
| 2004-2006 | 1.2-1.8% | 75-78% | 0.30-0.45% | Benign credit environment |
| 2007 | 1.1% | 78% | 0.24% | Credit bubble peak |
| 2008 | 3.4% | 65% | 1.19% | Financial crisis begins |
| 2009 | 9.8% | 58% | 4.12% | Peak of Global Financial Crisis |
| 2010 | 3.5% | 70% | 1.05% | Recovery phase |
| 2011-2014 | 1.8-2.5% | 72-76% | 0.48-0.70% | Post-crisis normalization |
| 2015 | 2.2% | 68% | 0.70% | Energy sector stress begins |
| 2016 | 3.8% | 62% | 1.44% | Energy/commodity defaults peak |
| 2017-2019 | 1.5-1.9% | 74-76% | 0.38-0.49% | Late-cycle benign environment |
| 2020 | 3.2% | 68% | 1.02% | COVID-19 pandemic (rapid recovery) |
| 2021-2023 | 0.8-1.3% | 76-78% | 0.19-0.31% | Post-COVID recovery; benign defaults |
| 2024 | 1.5% | 75% | 0.38% | Higher rates; resilient economy |
Source: S&P/LSTA Leveraged Loan Index, Moody's Default Studies. Rates reflect trailing 12-month defaults as % of outstanding loan market.
Key Observations
- Long-term average: 3.2% annual default rate (1994-2024)
- Range: 0.8% (2021 low) to 9.8% (2009 peak)
- Recovery rates: Consistently 60-80%, averaging 72% over full cycle
- Net losses: Typically 0.5-1.5% in normal years; 2-4% in severe recessions
Recovery Rates: Why Senior Secured Matters
CLOs hold senior secured loans—the first lien on a company's assets. This seniority drives high recovery rates even when companies fail.
Recovery Rates by Loan Type
| Loan/Bond Type | Average Recovery Rate | Range |
|---|---|---|
| 1st Lien Senior Secured Loans (CLO collateral) | 70-80% | 55-90% |
| 2nd Lien Loans | 30-40% | 10-60% |
| Senior Unsecured Bonds | 40-50% | 20-70% |
| Subordinated Bonds | 20-30% | 5-50% |
| Subprime Mortgages (2008 crisis) | 20-40% | 10-50% |
Why 1st lien loans recover more:
- Collateral: Secured by all company assets (equipment, inventory, receivables, IP)
- Priority: Paid first in bankruptcy, ahead of unsecured creditors and equity
- Covenants: Maintenance covenants trigger default before company runs out of cash
- Enterprise value: Loan balance typically 4-6x EBITDA; company's going-concern value >> loan amount
Default Rates vs. CLO Tranche Impairment
The table below shows what default rates would be required to impair each CLO tranche, assuming 75% recovery rates:
| Tranche | Subordination | Default Rate Required for Impairment | Historical Precedent |
|---|---|---|---|
| AAA | 35-40% | 140-160% cumulative defaults (35-40% net losses) | Never occurred |
| AA | 28-35% | 112-140% cumulative defaults | Never occurred |
| A | 21-28% | 84-112% cumulative defaults | Extremely rare |
| BBB | 14-21% | 56-84% cumulative defaults | Rare; 2007 vintages experienced stress |
| BB | 8-14% | 32-56% cumulative defaults | Some 2007-2008 vintages impaired |
| Equity | 0% | Any net losses reduce equity returns | All vintages experience some impact |
Note: "Cumulative defaults" refers to total defaults over the 10-12 year life of the CLO, not annual. A 140% cumulative default means $140 defaults per $100 of original portfolio (due to reinvestment, portfolios turn over).
2009 Case Study: Worst-Case Scenario
Even during the 2009 peak (9.8% annual default rate, the worst year on record):
- Cumulative defaults (2007-2010 cohort): ~18-22% of original portfolio
- Net losses (after recoveries): ~5-6% of portfolio
- AAA impairment: Zero. The 35-40% subordination cushion absorbed all losses.
- AA/A impairment: Minimal. A few 2007 A-rated tranches were downgraded but experienced no principal losses.
- BBB/BB impact: Many experienced payment deferrals (interest diverted to AAA); some BB tranches had principal write-downs.
- Equity impact: 2006-2008 vintages saw 30-60% capital losses.
Default Rates by Industry Sector
CLO portfolios are diversified across 30+ industries. Some sectors default more frequently than others:
| Industry Sector | Avg. Default Rate (2000-2024) | Typical CLO Exposure Limit |
|---|---|---|
| Retail (non-grocery) | 5.8% | 8-10% |
| Energy (exploration & production) | 5.2% | 8-10% |
| Telecommunications | 4.9% | 8-10% |
| Media & Entertainment | 4.1% | 10-12% |
| Healthcare Services | 3.2% | 12-15% |
| Business Services | 2.9% | 12-15% |
| Technology (software) | 2.5% | 12-15% |
| Food & Beverage | 2.1% | 10-12% |
| Chemicals | 1.8% | 8-10% |
| Aerospace & Defense | 1.2% | 6-8% |
Diversification requirements: CLO indentures typically limit single-industry exposure to 10-15% to prevent concentration risk. This ensures no single sector default wave can devastate the portfolio.
Default Rates: CLO Portfolios vs. Broad Market
A critical question: Do CLO managers select better credits, leading to lower defaults than the broad loan market?
CLO Portfolio Defaults vs. Market (2010-2024)
| Year | Broad Loan Market Default Rate | Avg. CLO Portfolio Default Rate | Manager Value-Add |
|---|---|---|---|
| 2010-2014 | 2.1% | 1.8% | -30 bps |
| 2015-2016 | 3.0% | 2.5% | -50 bps |
| 2017-2019 | 1.7% | 1.4% | -30 bps |
| 2020 | 3.2% | 2.8% | -40 bps |
| 2021-2024 | 1.1% | 0.9% | -20 bps |
Key insight: CLO portfolios consistently default 20-50 bps less than the broad market, suggesting manager credit selection adds value. However, this advantage varies by manager tier:
- Tier 1 managers: 40-60 bps below market
- Tier 2 managers: 20-40 bps below market
- Tier 3 managers: In-line with or slightly above market
Forward-Looking Default Expectations (2025-2026)
As of Q4 2024, consensus default rate forecasts:
| Scenario | 2025 Default Rate | 2026 Default Rate | Probability (Consensus) |
|---|---|---|---|
| Base Case | 2.0-2.5% | 2.5-3.0% | 55% |
| Optimistic (Soft Landing) | 1.5-2.0% | 1.5-2.0% | 25% |
| Pessimistic (Mild Recession) | 3.5-4.5% | 5.0-6.0% | 15% |
| Severe Recession | 5.0-7.0% | 7.0-9.0% | 5% |
Key drivers:
- Interest rates: Higher for longer (5%+ SOFR) pressures borrowers with floating-rate debt
- Maturity wall: $500B+ of leveraged loans mature 2025-2027, requiring refinancing
- Covenant-lite: 85%+ of loans are cov-lite, delaying early warning signals
- Private equity dry powder: $1.5T+ available to support portfolio companies
Defaults vs. Credit Spread Widening
Important distinction for CLO debt investors:
- Actual defaults: Impact equity and mezzanine tranches' cash flows
- Expected defaults (spread widening): Impact all tranches' market pricing
Example (March 2020):
- Analysts projected 8-12% default rates
- AAA CLO spreads widened from 130 bps to 500+ bps
- AAA CLO prices fell from 100 to 85-90
- Actual outcome: Defaults peaked at 3.2%; AAA recovered to par by Q4 2020
Lesson: Mark-to-market losses ≠ credit losses. Investors with long time horizons can often "look through" volatility driven by expected (but unrealized) defaults.
How Defaults Flow Through the Waterfall
When a loan defaults:
- Immediate impact: Loan marked down to recovery value (typically 70-80 cents)
- OC test impact: If enough loans default, OC ratios fall below triggers
- Cash diversion: Interest payments diverted from equity/mezzanine to AAA/AA (deleveraging)
- Principal loss: Once loan is liquidated or restructured, realized loss reduces equity NAV
- Sequential absorption: Equity absorbs 100% of losses until wiped out, then BB, then BBB, etc.
Learn more about coverage test mechanics →
Key Takeaways
Historical Ranges
- Normal: 1.5-3% defaults
- Stress: 4-6% defaults
- Crisis: 8-10% defaults
- Recovery: 70-80% (senior secured)
Tranche Protection
- AAA: Never impaired (30 years)
- AA/A: Extremely rare impairment
- BBB: Deferrals in severe stress
- Equity: Direct impact from all defaults
Manager Impact
- Tier 1: 40-60 bps below market
- Tier 2: 20-40 bps below market
- Active management matters
- Diversification reduces concentration
Forward Outlook
- 2025-2026: 2-3% base case
- Recession scenario: 5-6%
- Structural protections intact
- Senior secured recoveries remain high
Further Reading
- Historical Returns – How defaults impacted actual CLO returns
- CLO vs CDO – Why CLO recoveries far exceeded mortgage CDOs
- Coverage Tests – How defaults trigger structural protections
- CLO Equity – First-loss exposure to defaults
Disclaimer
Historical default rates do not guarantee future performance. Forward-looking estimates are subject to significant uncertainty. This content is educational only and does not constitute investment advice.