Debt Exchanges Hit Record 79% of CLO Defaults
Lenders recovered less on these out-of-court deals, so investors in loan-backed securities may see lower returns from defaulted loans.
Updated on Nov. 4, 2026 in Debt Relief
Distressed debt exchanges now account for a record 79% of defaults so far this year in collateralized loan obligation (CLO) portfolios rated by Fitch Ratings, up from a previous high of 69% set in 2024. Out-of-court restructurings have become the dominant route for distressed borrowers, reshaping how lenders recover money.
Why it matters
The shift away from in-court bankruptcy changes what lenders recover when borrowers default, which affects the returns on loan-backed investments held by pension funds, insurers and other institutions that many households rely on indirectly. Fitch updated its CLO ratings criteria in June to reflect this trend toward out-of-court workouts and fewer bankruptcies.
Par-weighted recoveries on distressed debt exchanges dropped to 85.0% in 2025 from 93.0% in 2024, while the historical first-lien bankruptcy recovery averages about 62%. Out-of-court restructurings reached 18 through Q3 2026, compared with 29 in the same period last year.
The players
Fitch Ratings
A credit rating agency whose CLO ratings criteria shape how investors assess the risk of loan-backed securities held by pension funds and insurers.
Octus Intelligence
A restructuring data provider that tracks out-of-court debt restructurings, a source of information for investors assessing distressed credit.
The details
Distressed borrowers increasingly restructure debt through exchanges with lenders instead of filing for bankruptcy. In below-par liability management transactions, senior lenders outside a favored group receive debt priced below par, which can reduce what those lenders ultimately recover. Fitch's updated CLO criteria retired elements that reflected debt-instrument-level recoveries in insolvency and bankruptcy, reflecting how the default route has changed.
Timeline
2018: Trend toward distressed debt exchange defaults began, with bankruptcies falling below 50% of defaults.
2024: The previous high of 69% for the DDE share of defaults was set.
June 2026: Fitch announced its CLO ratings criteria update.
September 2026: Six obligor default events were recorded, five of them distressed debt exchanges.
Money Landscape
Out-of-court restructurings have displaced in-court bankruptcy as the main default route in CLO portfolios, a shift that began around 2018 when bankruptcies fell below half of defaults. Fitch's June 2026 criteria update formalized this change in how loan-backed securities are rated.
If you hold funds or retirement accounts with exposure to loan-backed securities, lower recoveries on distressed exchanges may affect returns, so it is worth reviewing your holdings with a qualified financial professional. Borrowers facing financial strain should know that out-of-court restructuring is becoming a more common path than bankruptcy.
The takeaway
Distressed debt is increasingly resolved through negotiated exchanges rather than bankruptcy courts, which can lower lender recoveries. If your retirement or investment accounts hold loan-backed assets, consider asking a qualified financial professional how these recovery trends fit your overall plan.
Further reading
Learn more about how borrowers manage debt relief options when restructuring is an alternative to bankruptcy.
Source note: This article includes information reported by Asset Securitization Report.
