Distressed Debt Exchanges Reach Record CLO Defaults
Out-of-court restructurings now account for 79% of defaults in CLO portfolios rated by Fitch Ratings this year.
Updated on Nov. 4, 2026 in Debt Relief
Distressed debt exchanges made up a record 79% of defaults so far this year in CLO portfolios rated by Fitch Ratings, up from the previous high of 69% set in 2024. Lenders have recovered more through these out-of-court deals than through in-court bankruptcies.
Why it matters
Fitch's June CLO ratings criteria update reflects the shift away from bankruptcy-driven defaults, as fewer borrowers are entering formal insolvency. The trend signals how liability management is reshaping recovery outcomes for senior lenders.
Par-weighted recoveries on distressed debt exchanges fell to 85.0% in 2025 from 93.0% in 2024, while below-par recoveries dropped to 65.5% from 86.0%. Fitch's dataset does not show whether this decline will continue, and the portfolio base for the 79% share is not stated.
The players
Fitch Ratings
A global credit rating agency whose CLO ratings criteria update announced in June 2026 retired elements tied to debt-instrument-level recoveries in insolvency and bankruptcy.
Octus Intelligence
A distressed debt research and intelligence provider that tracks out-of-court debt restructurings, recording 18 through Q3 2026.
The details
Borrowers in distressed situations are restructuring debt through exchanges outside bankruptcy court, and below-par liability management transactions have given senior lenders outside favored groups debt priced below par. Fitch's data shows weighted-average DDE recoveries ranging from 75.8% to 92.7%, depending on the valuation method, compared with a historical first-lien bankruptcy recovery of about 62%.
Timeline
2018: Trend toward DDE defaults began as bankruptcies fell below 50% of defaults.
2024: The previous high of 69% DDE share of defaults was set.
June 2026: Fitch announced its CLO ratings criteria update.
Q3 2026: Out-of-court restructurings fell to 18 year-to-date, compared with 29 a year earlier.
September 2026: Six obligor default events were recorded, five of them DDEs.
Market Dynamics
Fitch's June 2026 CLO criteria update responded directly to a rising share of distressed debt exchanges among defaults, which outpaced in-court bankruptcies. The shift has moved recovery outcomes away from the historical pattern in which first-lien bankruptcy recoveries averaged about 62%.
Investors holding CLO tranches face recovery outcomes that increasingly depend on out-of-court exchanges rather than court-supervised bankruptcy. Below-par exchanges have lowered recoveries for lenders outside favored groups, which affects portfolio returns for those holding senior debt.
The takeaway
Lenders are recovering more through distressed debt exchanges than through bankruptcy, but recoveries on below-par deals have fallen sharply, making the structure of each restructuring deal increasingly important to outcomes.
Further reading
For background on how borrowers restructure obligations outside court, see Debt Relief.
