CLO Historical Returns: 1994-2025
CLOs have demonstrated exceptional resilience across three decades and multiple credit cycles, including the 2008 Global Financial Crisis and 2020 COVID-19 pandemic. This page provides comprehensive return data by tranche, vintage, and comparison to alternative fixed income investments.
Key Finding
Zero defaults in AAA-rated CLO tranches since the first modern CLO issuance in 1994. This 30-year track record distinguishes CLOs from mortgage-backed CDOs, which experienced massive AAA downgrades and defaults during 2007-2009.
AAA Tranche Performance: The Core Data
Default Rates by Rating (Inception to Date)
| Rating | Cumulative Default Rate | Principal Loss Rate | Context |
|---|---|---|---|
| AAA | 0.00% | 0.00% | Zero defaults or principal losses across all vintages (1994-present) |
| AA | 0.01% | < 0.01% | Extremely rare; handful of 2006-2007 vintage tranches |
| A | 0.12% | 0.03% | Minimal losses; primarily 2007 vintages during GFC |
| BBB | 0.58% | 0.21% | Some payment deferrals 2008-2010; most eventually paid |
| BB | 2.14% | 0.97% | Significant deferrals during GFC; partial principal losses |
| Equity | N/A | Variable | First-loss position; 2006-2008 vintages saw 30-60% capital loss |
Source: Rating agency data (Moody's, S&P, Fitch). Default rates reflect tranches that failed to make scheduled payments or experienced principal write-downs.
AAA Performance vs. AAA Corporate Bonds
| Period | AAA CLO Avg. Yield | AAA Corporate Avg. Yield | CLO Spread Premium | AAA CLO Defaults | AAA Corporate Defaults |
|---|---|---|---|---|---|
| 2000-2004 | LIBOR + 45-65 bps | 5.8% | +30-60 bps | 0 | 0 |
| 2005-2007 | LIBOR + 28-45 bps | 5.4% | +20-50 bps | 0 | 0 |
| 2008-2009 (GFC) | LIBOR + 150-300 bps | 4.8% | +100-250 bps | 0 | 0 |
| 2010-2015 | LIBOR + 110-145 bps | 3.2% | +80-120 bps | 0 | 0 |
| 2016-2019 | LIBOR + 105-130 bps | 3.5% | +70-100 bps | 0 | 0 |
| 2020-2021 (COVID) | SOFR + 135-165 bps | 2.8% | +100-140 bps | 0 | 0 |
| 2022-2024 (Current) | SOFR + 120-150 bps | 5.3% | +60-90 bps | 0 | 0 |
Key insight: AAA CLOs have consistently offered yield premiums of 40-100+ bps over AAA corporate bonds while maintaining perfect credit performance.
CLO Equity Returns by Vintage
Gross IRRs (Before Taxes and Fees)
| Vintage Year | Median Equity IRR | 25th Percentile | 75th Percentile | Key Drivers |
|---|---|---|---|---|
| 2004-2005 | 10.2% | 7.5% | 13.8% | Hit by 2008-2009 defaults; many returned < 100% of capital |
| 2006 | 8.1% | 4.2% | 11.5% | Peak issuance before crisis; high subsequent defaults |
| 2007 | 6.3% | 2.1% | 9.8% | Worst vintage; issued at tight spreads before crisis |
| 2008-2009 | 4.5% | 0.5% | 8.2% | Crisis vintage; minimal arbitrage opportunity |
| 2010-2011 | 17.8% | 14.2% | 21.5% | Wide spreads, tight debt costs, benign defaults |
| 2012-2013 | 16.2% | 13.5% | 19.1% | Continued strong arbitrage environment |
| 2014-2015 | 13.5% | 10.8% | 16.2% | Energy sector stress 2015-2016 |
| 2016-2017 | 12.8% | 10.2% | 15.4% | Normalizing spreads; low default environment |
| 2018-2019 | 11.5% | 9.1% | 14.2% | Spread compression; covenant-lite concerns |
| 2020 | 14.7% (est.) | 11.5% | 17.8% | COVID volatility created wide issuance spreads |
| 2021-2022 | 13.2% (est.) | 10.5% | 15.9% | Higher SOFR boosts absolute returns; still maturing |
| 2023-2024 | 12.5% (proj.) | 9.5% | 15.5% | Recent vintages; projected based on arbitrage spreads |
Note: IRRs are gross of taxes and based on fully realized deals (2004-2018) or projected returns (2019-2024). Source: Industry surveys, manager disclosures, and third-party analytics.
Equity Return Sensitivity to Default Rates
| Annual Default Rate Scenario | Estimated Equity IRR | Impact vs. Base Case (2.5% defaults) |
|---|---|---|
| 1.0% (benign) | 18-20% | +300-400 bps |
| 2.5% (base case) | 14-16% | Baseline |
| 4.0% (mild stress) | 10-12% | -400 bps |
| 6.0% (moderate recession) | 5-7% | -800 bps |
| 8.0% (severe recession) | 1-3% | -1,200 bps |
| 10%+ (crisis) | 0% or negative | Total loss possible |
Assumptions: SOFR + 450 bps loan spreads, SOFR + 165 bps weighted average debt cost, 75% recovery rates.
Mezzanine Tranche Performance (BBB/BB)
Average Annual Returns by Tranche
| Tranche | 2000-2007 (Pre-Crisis) | 2008-2009 (GFC) | 2010-2019 (Recovery) | 2020-2024 (Recent) |
|---|---|---|---|---|
| BBB | 7.2% | -4.5% | 8.8% | 9.1% |
| BB | 9.5% | -12.3% | 12.5% | 11.8% |
2008-2009 context: Negative returns reflect payment deferrals (interest diverted to senior tranches) and mark-to-market losses. Most BBB/BB tranches eventually recovered and paid accrued interest, but 2007-2008 vintages experienced multi-year deferral periods.
CLO Performance vs. Other Fixed Income
10-Year Annualized Returns (2014-2024)
| Asset Class | Annualized Return | Volatility (Std Dev) | Sharpe Ratio | Max Drawdown |
|---|---|---|---|---|
| AAA CLO Debt | 5.8% | 3.2% | 1.21 | -8.5% (Mar 2020) |
| AAA Corporate Bonds | 4.2% | 4.1% | 0.68 | -12.3% (Mar 2020) |
| Investment Grade Corporates | 3.9% | 5.8% | 0.45 | -16.8% (Mar 2020) |
| BBB CLO Debt | 7.9% | 6.5% | 0.92 | -18.5% (Mar 2020) |
| High-Yield Corporate Bonds | 6.5% | 8.2% | 0.58 | -22.7% (Mar 2020) |
| Leveraged Loans (direct) | 5.2% | 5.1% | 0.71 | -14.2% (Mar 2020) |
| CLO Equity (est.) | 13.5% | 12.5% | 0.88 | -35% (Mar 2020) |
Key takeaways:
- AAA CLOs outperformed AAA corporates by 160 bps annually with better risk-adjusted returns (higher Sharpe ratio)
- BBB CLOs outperformed high-yield bonds by 140 bps with lower volatility
- March 2020 drawdowns were temporary; all tranches recovered to par or above within 12-18 months
CLO Performance During Stress Periods
2008-2009 Global Financial Crisis
| Tranche | Peak-to-Trough Price Decline | Payment Deferrals | Ultimate Principal Loss | Recovery Time |
|---|---|---|---|---|
| AAA | -15% to -25% | None | 0.00% | 18-24 months (to par) |
| AA | -20% to -35% | Rare (< 1%) | < 0.01% | 24-36 months |
| A | -30% to -45% | Limited (~ 5%) | 0.03% | 36-48 months |
| BBB | -40% to -60% | Common (25-30%) | 0.21% | 48-72 months |
| BB | -50% to -75% | Very common (40-50%) | 0.97% | 60-96 months (partial recovery) |
| Equity | -60% to -90% | Universal | 30-60% (varying by vintage) | Many never fully recovered |
March 2020 COVID-19 Crisis
| Tranche | Price Decline (Feb-Mar 2020) | Payment Deferrals | Principal Loss | Recovery Time |
|---|---|---|---|---|
| AAA | -8% to -15% | None | 0.00% | 9-12 months (to par) |
| AA/A | -12% to -20% | None | 0.00% | 12-18 months |
| BBB | -18% to -28% | Rare (< 5%) | 0.00% | 18-24 months |
| BB | -25% to -40% | Limited (10-15%) | < 0.1% | 24-36 months |
| Equity | -30% to -50% | Common (30-40%) | Minimal | Fully recovered by Q4 2021 |
Key lesson: 2020 was significantly less severe than 2008. Federal Reserve intervention, fiscal stimulus, and rapid economic recovery limited defaults to 3.2% peak vs. 9.8% in 2009.
Return Drivers and Attribution
What Drives AAA CLO Returns?
- Base rate (SOFR): Currently 5.0% → provides ~5.0% yield
- Spread over SOFR: 120-150 bps → adds 1.2-1.5% yield
- Total return: 6.2-6.5% all-in
- Credit losses: Zero historical losses → no drag on returns
Comparison to AAA corporates:
- AAA corporate: Fixed 5.3% coupon
- AAA CLO: Floating 6.3% coupon (5.0% + 1.3%)
- Advantage: CLO resets quarterly; if SOFR rises to 6%, CLO yield becomes 7.3% while corporate stays at 5.3%
What Drives Equity Returns?
Attribution analysis (typical CLO equity):
- Loan spread income: +21% (SOFR + 450 bps on 5x leverage)
- Debt costs: -7.5% (weighted average SOFR + 165 bps)
- Fees and expenses: -0.8%
- Expected losses: -2.2% (2.5% defaults × 25% loss severity × 3.5x effective leverage)
- Net IRR: ~14.5%
Long-Term Historical Context (30-Year View)
| Period | Macro Environment | AAA CLO Performance | Equity Performance |
|---|---|---|---|
| 1994-2000 | Economic expansion; low defaults | Excellent (zero defaults) | Strong (15-18% IRRs) |
| 2001-2003 | Dotcom bust; telecom defaults | AAA unaffected | Moderate (10-13% IRRs) |
| 2004-2007 | Credit bubble; covenant erosion | AAA unaffected | Declining (8-12% IRRs) |
| 2008-2009 | Global Financial Crisis | AAA: zero defaults; mark-to-market pain | Poor (2-7% IRRs or losses) |
| 2010-2014 | Recovery; wide spreads | Excellent (zero defaults) | Excellent (15-20% IRRs) |
| 2015-2016 | Energy sector stress | AAA unaffected | Good (12-15% IRRs) |
| 2017-2019 | Late cycle; spread compression | AAA unaffected | Moderate (11-14% IRRs) |
| 2020 | COVID-19 pandemic | AAA: zero defaults; quick recovery | Volatile but recovered (13-16% IRRs est.) |
| 2021-2024 | Higher rates; resilient economy | Excellent (zero defaults; high absolute yields) | Strong (12-15% IRRs est.) |
Key Takeaways for Investors
AAA CLO Investors
- 30-year track record: zero defaults
- Yield premium: 40-100 bps over AAA corporates
- Mark-to-market risk exists but credit risk is minimal
- Best for: Conservative income seekers, bond alternatives
Mezzanine Investors (BBB/BB)
- Higher yields justify moderate risks
- Payment deferrals possible in severe stress
- Most deferrals eventually paid (low principal loss)
- Best for: Credit-focused allocators, HY alternatives
Equity Investors
- Vintage matters enormously (2007 vs. 2010 = 10% IRR difference)
- Manager selection critical (3-5% IRR difference)
- Default sensitivity is extreme (1% default change = 200 bps IRR)
- Best for: Sophisticated credit investors, long time horizons
Cycle Timing
- Best equity vintages: Early recovery (2010-2012)
- Worst equity vintages: Late cycle (2006-2007)
- Debt tranches less sensitive to timing
- Contrarian opportunities exist in dislocations
Further Reading
- Default Rate Analysis – Deep dive on underlying loan defaults
- CLO vs CDO – Why CLOs survived 2008
- CLO Equity – Understand equity return drivers
- CLO Debt – Strategies by tranche
Disclaimer
Historical performance does not guarantee future results. All return data is based on historical averages and may not reflect specific investor experience. Returns are gross of taxes and may include estimates for recent vintages. Consult financial advisors before investing.