A type of investment that once generated some of Wall Street's juiciest fixed-income returns has deteriorated so badly that investors are heading for the exits and arguing about who's to blame. Collateralized Loan Obligations (CLOs), which pool leveraged loans and slice them into tranches, have seen spreads widen dramatically as default fears mount.

The Bloomberg Credit Weekly report highlights how CLO equity investors, who once enjoyed double-digit yields, are now facing steep mark-to-market losses. Junior tranche holders are particularly exposed as loan prices slip below par. This has triggered disputes between equity investors and CLO managers over fee structures, reinvestment periods, and whether managers are adequately defending collateral quality.

Some investors allege managers prioritized new issuance fees over protecting existing deals, while managers counter that market conditions are beyond their control. The infighting threatens to slow new CLO formation, which had been a key driver of leveraged loan demand. With the Federal Reserve holding rates higher for longer, the outlook for loan repayments and CLO performance remains uncertain.