KBRA Research Highlights Resilience in Structured Credit Markets Amid AI Disruption Concerns and Geopolitical Uncertainty
The global structured credit market entered 2026 on relatively stable footing, with issuance activity, collateralized loan obligation (CLO) spreads, and credit performance indicators showing resilience despite an increasingly complex macroeconomic environment. However, according to newly released research from KBRA, emerging geopolitical tensions, evolving inflation risks, and the growing influence of artificial intelligence (AI) are creating new considerations for investors, issuers, and market participants.
The report provides a comprehensive overview of structured credit market performance through the first quarter of 2026 while also examining the broader economic and technological developments that may influence market behavior in the months ahead. Although issuance volumes and spread levels remained generally consistent with trends observed throughout 2025, KBRA notes that these positive indicators largely predated the recent increase in uncertainty caused by global events and changing economic expectations.
As markets navigate questions surrounding interest rates, inflation, private credit growth, and AI-driven disruption, structured finance sectors continue to demonstrate a notable degree of stability. Nevertheless, the combination of geopolitical conflict and technological transformation is expected to shape the direction of the market throughout the remainder of the year.
Structured Credit Market Maintains Momentum
The first quarter of 2026 saw continued activity across the structured credit landscape, particularly within the CLO market, one of the largest and most important sectors within structured finance.
In the United States, broadly syndicated loan (BSL) CLO issuance reached approximately $40 billion during the first quarter, representing a significant increase compared to the same period in 2025. The strong issuance pace reflects ongoing investor demand for structured credit products and the continued availability of leveraged loan collateral supporting new CLO formation.
Average AAA-rated BSL CLO spreads remained relatively stable, fluctuating within a narrow range between 115 basis points and 131 basis points. Such consistency suggests that investor confidence in senior CLO tranches remained intact during the early months of the year despite broader economic uncertainties.
Meanwhile, middle market (MM) CLOs continued to attract growing investor interest. Spread premiums for AAA-rated middle market CLO transactions tightened during the period, indicating improving market acceptance and strengthening demand for these structures. The middle market CLO segment has increasingly become an important source of financing for private credit borrowers and direct lending platforms, making its continued development an area closely monitored by investors.
KBRA emphasized that much of this positive market performance occurred before geopolitical concerns intensified, suggesting that future issuance and spread dynamics could be influenced by changing macroeconomic conditions.
Middle East Conflict Raises New Inflation Questions
One of the most significant emerging risks identified in KBRA’s research is the potential economic impact of ongoing conflict in the Middle East.
Historically, geopolitical instability in energy-producing regions has created upward pressure on commodity prices, particularly oil and natural gas. Higher energy costs can quickly translate into broader inflationary pressures across global economies by increasing transportation, manufacturing, and operational expenses.
According to KBRA, renewed inflation concerns could complicate the outlook for monetary policy in 2026. Many investors entered the year expecting central banks to continue easing monetary conditions following previous rate-hiking cycles. However, inflationary pressures driven by geopolitical events may limit policymakers’ flexibility.
The situation becomes even more complex when combined with the continued strength of labor markets in many developed economies. Strong employment figures and resilient wage growth can support consumer spending but may also contribute to persistent inflation. As a result, uncertainty regarding the future direction of benchmark interest rates has increased.
For structured credit markets, changes in interest rate expectations can significantly influence issuance volumes, financing costs, investor demand, and overall spread performance. Market participants are therefore closely monitoring both geopolitical developments and central bank responses.
Artificial Intelligence Remains a Major Market Theme
Alongside geopolitical risks, artificial intelligence continues to be one of the most widely discussed topics across credit markets.
The rapid advancement of AI technologies has generated both optimism and concern among investors. On one hand, AI has the potential to enhance productivity, streamline operations, and create new business opportunities. On the other hand, it raises questions about business model disruption, competitive pressures, workforce transformation, and long-term credit risk.
KBRA’s research notes that concerns surrounding AI-driven disruption and capital formation are expected to remain central themes throughout 2026. Investors continue to evaluate how emerging AI technologies may affect borrowers across various industries, particularly software, technology, and recurring revenue businesses.
Despite ongoing headlines about AI’s transformative potential, KBRA’s analysis indicates that its rated recurring revenue asset-backed securities (ABS) transactions have remained largely unaffected thus far. These securitizations, which often rely on contractual subscription revenues from software and technology companies, continue to demonstrate stable performance characteristics.
According to KBRA, the mechanisms through which AI-related disruption may ultimately impact corporate credit profiles are still evolving. Any material effects are likely to emerge gradually over multiple contract renewal cycles rather than causing immediate credit deterioration.
This perspective suggests that while AI remains a critical strategic issue for investors, its direct impact on structured credit performance has not yet become a significant ratings concern.
Rating Activity Reflects Continued Stability
KBRA’s rating and surveillance activities provide additional insight into the health of the structured credit market.
Through May 2026, KBRA assigned ratings to 20 structured credit transactions representing approximately $5.7 billion in issuance volume. The transactions covered a diverse range of asset classes and structures, highlighting the broadening scope of modern structured finance markets.
The rated transactions included:
- Four European broadly syndicated loan CLOs
- Nine U.S. middle market CLOs and credit facilities
- Two recurring revenue securitizations
- Three trust preferred securities collateralized debt obligations
- One synthetic risk transfer transaction
- One European middle market CLO
The diversity of issuance demonstrates the continued expansion of structured credit beyond traditional CLO markets into newer financing structures serving specialized sectors and borrower categories.
Surveillance activity also reflected a generally stable environment. During 2025, KBRA completed 901 rating actions across 169 structured credit transactions. These actions resulted in 10 upgrades and no downgrades, an outcome that underscores the overall resilience of rated structures during a period of economic uncertainty.
The trend largely continued into 2026. During the first quarter, KBRA completed 141 rating actions across 32 transactions. The actions resulted in one upgrade and one downgrade, indicating that credit performance remains broadly balanced.
One notable exception occurred during the second quarter when a mezzanine tranche was placed on Watch Downgrade. According to KBRA, the action was primarily driven by structural protections designed to safeguard senior investors. These mechanisms caused the junior tranche to defer interest payments, triggering heightened surveillance attention.
Even with this isolated development, overall rating performance remains consistent with expectations and supports the broader narrative of market stability.
European CLO Markets Continue to Evolve
The European CLO market presents a somewhat different picture compared to the United States.
European broadly syndicated loan CLO issuance totaled approximately EUR15 billion during the first quarter of 2026. While still substantial, this volume represented a decline of roughly 12% compared to the first quarter of 2025.
KBRA attributes some of this slowdown to tighter arbitrage economics. As financing costs and spread relationships have evolved, the profitability of new CLO issuance has become more challenging, leading to a temporary pause in certain areas of the market.
Despite this moderation, investor demand for European CLO assets remains relatively healthy.
At the same time, the European middle market CLO sector continues to gain traction. Although still in its early stages compared to the more mature U.S. market, the segment is attracting increasing attention from both issuers and investors seeking exposure to private credit opportunities.
Growing participation in European middle market CLOs reflects broader trends across global credit markets, where private lending and direct lending strategies continue to expand as alternatives to traditional bank financing.
Default Rates Remain Manageable
Credit performance metrics remain an important indicator of structured credit market health, and KBRA’s findings suggest that current default levels remain manageable within rated transactions.
The KBRA Middle Market Default Monitor (KMDM) reported a default rate by count of 3.1% during the first quarter of 2026. This represented an improvement from the recent peak of 3.9% recorded one year earlier.
While the default rate measured by value increased to 2.2%, reaching a recent high, overall levels remain within ranges that structured credit vehicles are generally designed to absorb.
Within KBRA’s rated broadly syndicated loan portfolio, the weighted average default rate by notional amount reached 72 basis points during the first quarter. Although this represented a two-year high, it remained relatively low from a historical perspective.
Importantly, KBRA believes that both middle market and broadly syndicated loan default levels remain broadly absorbable within the structural protections embedded in rated CLOs and other structured credit vehicles.
Features such as overcollateralization tests, diversion mechanisms, excess spread, and subordination continue to provide meaningful protection against credit losses, helping preserve rating stability even during periods of elevated defaults.
Looking ahead, structured credit markets face a complex combination of opportunities and challenges.
On one side, strong issuance activity, stable rating performance, manageable default levels, and growing investor demand continue to support the sector’s fundamentals. The ongoing expansion of private credit markets and middle market lending also creates new opportunities for issuers and investors alike.
On the other side, geopolitical tensions, inflation uncertainty, evolving monetary policy expectations, and the long-term implications of artificial intelligence represent significant variables that could influence market conditions.
KBRA’s analysis suggests that while these factors warrant close monitoring, the structured credit market currently remains well-positioned to navigate near-term volatility. Existing credit structures continue to demonstrate resilience, and rating performance remains largely stable despite an increasingly uncertain global backdrop.
As 2026 progresses, investors will likely focus on how inflation trends evolve, whether central banks continue easing monetary conditions, how geopolitical developments affect economic growth, and the extent to which AI-driven transformation begins to influence corporate credit performance. Together, these themes are expected to shape the next chapter of structured credit market development.
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