LevFin interviews Tracey Jackson: Navigating BSL CLO arbitrage and spread volatility

CLO Q&A with First Eagle's quant chief on navigating BSL CLO arbitrage and spread volatility

In an exclusive interview, LFI spoke with Tracey Jackson, First Eagle Alternative Credit's managing director, CLO portfolio management and head of quantitative analytics, about her role running the firm's BSL CLO management business and challenges navigating the current credit market. According to the Fitch Ratings CLO Asset Manager Handbook (April 2025) the firm started its BSL platform in 1999 and now has 28 active deals and $11.6bn loan AUM, managed by six portfolio managers and 13 analysts.

Jackson explained that the platform is navigating tight spreads and a compressed arbitrage by prioritizing credit quality and portfolio diversification. Market participants are increasingly focused on reducing exposure to lower-rated B2 andB3 credits, which are more susceptible to downgrades, while seeking opportunities to add discounted loans during periods of market volatility. This strategic shift reflects a broader emphasis on principal preservation and maintaining the value of existing loan portfolios in an environment shaped by ongoing trade policy uncertainties and technical volatility.

Recent months have seen Triple A CLO spreads tighten into the low 130s, with the potential to reach the mid-120s, if strong investor demand continues. In this context, Triple B tranches have emerged as particularly attractive, offering compelling relative value versus similarly rated corporate bonds due to structural protections such as Double B overcollateralization coverage and subordination. Meanwhile, manager quality has become a key differentiator in Double B tranches, where spreads can range from 500bps for conservative managers to 700bps for others, depending on portfolio quality and investor perception.

Manager tiering is especially pronounced in the lower-rated segments of the CLO capital stack. While spread differentials at the Triple A level are typically modest, the gap for Double B tranches can be as wide as 200bps. This reflects heightened investor scrutiny of managers’ track records, risk management capabilities, and their performance through previous market cycles, all of which drive pricing differentiation and motivate managers to maintain robust risk management practices.

Overall, credit quality, spread dynamics and manager performance are top-of-mind for CLO market participants. As the market continues to evolve, these factors will remain critical in shaping portfolio strategies and ensuring resilience amid changing technical and macroeconomic conditions.

Full Q&A

LFI: What’s top of mind for CLOs and leveraged loans at the moment?

Jackson: Tariffs and broader trade policy uncertainties are impacting market sentiment. Fundamentally, credit quality is paramount—this ultimately determines the performance of CLO transactions and structures. We’re also watching technical loan market volatility, driven by shifting policy from the current administration, and the supply and demand imbalance of loans. We are contending with credit bifurcation—the “haves and have-nots”—shown by increased liability management exercise (LME) activity.

Spreads are very tight, and arbitrage in the BSL CLO market has been compressed. Reaching for spread in lower-rated credits doesn’t appear attractive right now for us. At our firm, we’re focused on principal preservation and maintaining the value of our existing loans. Over the past nine months, we’ve increased diversification, lowered concentration in B2 and B3 credits—those most at risk of being downgraded to Triple C—and turned over our portfolio more frequently, resulting in an overall uplift in quality. Buying a B3 rated loan at 99.5, S+300 is less compelling than a B1 loan at S+250at the same price. We are leaning up in quality and waiting for technical volatility to create opportunities to buy discounted B3 names in the secondary, rather than in the primary market.

LFI: Where do you expect new issue spreads for Triple A and Double B tranches in the next four to six weeks?

Jackson: Triple A spreads have recently tightened, supported by stronger demand. After a period of limited supply earlier in the year, we’ve seen tights in the low 130s. If demand remains robust, we believe mid-120s are achievable. For double Bs, manager performance is more critical than ever. Conservative managers can achieve levels around 500bps—historically tight—while others might see levels widen towards 700bps, depending on portfolio quality and investor perception.

LFI: Can you elaborate on manager tiering at the Double B level?

Jackson: Manager tiering is much more pronounced at the bottom of the stack. At the triple A level, tiering is usuallybetween 10 and 20bps. However, for Double Bs, the gap can range from 100bps to 200bps, depending on managerreputation and historical performance. The CLO market is now mature, with most managers able to demonstrate a track record over 10-15 years. Investors are scrutinizing how managers handled previous cycles, CLO resets and tail risk. This drives pricing differentiation and motivates managers to maintain strong risk management to keep Double B funding costs as tight as possible.

LFI: Could BSL CLOs become even larger buyers of loans, even if M&A activity remains subdued?

Jackson: CLOs must remain fully invested—they cannot hold significant cash positions. Whether CLOs increase their share of loan demand will depend on overall CLO issuance. There are currently over 200 warehouses open, and average warehouse balances are around $100mn, suggesting there is ready demand for new loans. Any increase in loan supply would likely be absorbed quickly by CLOs, supporting the market.

LFI: Is M&A loan volume picking up?

Jackson: We are seeing some new supply, such as a recent large transaction from JP Morgan, and repricing activity has also increased as spreads tighten. However, we don’t anticipate a significant increase in M&A activity in the near term. Rates have remained steady, and there have not been many private equity liquidity events. Without exits, private equity sponsors are slower to redeploy capital into new leveraged buyouts.

LFI: Where do you see relative value opportunities for CLOs across the capital stack?

Jackson: While we aren’t actively investing in CLO debt right now, we find Triple B tranches particularly attractive. Junior Triple Bs are pricing around 400bps, depending on manager quality. This offers attractive relative value compared to similarly rated corporate bonds, given the structural protections at the Triple B level, such as Double B OC coverage and subordination. This segment suits buy-and-hold investors, as price volatility may persist, but the long-term value is compelling.

LFI: How does First Eagle manage its CLO equity? Is there a shift toward captive versus third-party equity?

Jackson: We have strong relationships with third-party equity investors, which remain important. However, we see growing value in the captive equity model and are launching our own captive fund to invest across both broadly syndicated and private credit CLOs. Our track record includes six private credit CLOs since 2019, and we believe the arbitrage in private credit CLOs remains compelling. While the captive equity market is still limited, interest is growing.

LFI: Are there any notable changes in CLO structures or documentation?

Jackson: A recent development is the inclusion of “drop down” concentration limits, where loans are classified as “dropdown” if the issuer can move assets into unrestricted subsidiaries. This reflects greater scrutiny of documentation to ensure that CLO collateral is properly ring-fenced and that only a limited portion of these riskier loans are permitted in CLO portfolios.

LFI: How is collateral sourcing changing?

Jackson: It’s challenging. While performing loans above par are available, buying above par is never ideal for a CLO manager, especially given modest new loan issuance. Staying invested without becoming overexposed to single names is a key focus for us. Loans trading at a discount could reflect underlying issues, and liquidity can dry up rapidly if credit concerns emerge. With CLOs comprising such a large part of the market, when there is trouble, the exit can become crowded, leading to rapid price drops—far faster than a decade ago.

LFI: What broader market trends are you observing?

Jackson: The market remains stable, with most loans trading above par as long as issuers meet budget expectations. Across the CLO market, managers are increasing portfolio diversity and quality, reducing Triple C buckets to allow room for potential downgrades. Many are focused on avoiding negative credit migration and minimizing portfolio volatility.

LFI: Any thoughts on the secondary market, either for tranches or for ramping new issue collateral?

Jackson: We’re not very active in secondary tranche trading currently. For secondary loan ramping, assembling a portfolio below par is increasingly difficult. We are cautious, preferring to wait for volatility or to price a transaction before buying, rather than risk being underwater on secondary purchases if the market moves.

DEFINITIONS:
A collateralized loan obligation (CLO) is a single security backed by a pool of debt.

A syndicated loan is financing offered by a group of lenders—called a syndicate—who work together to provide funds for a borrower.

Broadly-syndicated loans (BSL) are the most common form of leveraged bank loans, i.e., loans supported by cash flows to finance mergers, acquisitions, and recapitalizations.

DISLCOSURES:
Unless otherwise stated, all information contained in this material is as of February 3, 2025. 

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