I feel like I could do a better job summarizing the current situation
So, again, for everyone just tuning in and wondering where Nightmare is suddenly coming from:
Recently it's been a bloodbath of deconfirmations from insiders and even Nintendo themselves with the Resident Evil spirit event. All of the big names being shot down one by one, the MallowDemon leak is stuck in limbo, and all signs were pointing towards Fighter 5 being Lloyd Irving.
Lloyd had everything going for him: Seemingly the last big requested name standing, He's a long overdue Namco rep who
literally helps make Smash, the recent Tales Of icon trademarks, his VA being under an NDA for a mystery project, he's a big request in Japan and Sakurai did want him in at some point in the past... Everything was clear for a smooth landing until just today, Sabi came to us with news that their source said no to Lloyd
On a previous occasion, Fatmanonice (Who to clarify, hears some of the same things Sabi does but isn't a leaker, they speculate like the rest of us, just with some better insight) mentioned that the big three names that were floating around were
Lloyd, Sol Badguy, and Nightmare
With Lloyd being out, Nightmare seems like he is the logical choice in that bunch: He too is a Namco Rep, He's practically the face of the franchise, and Soul Calibur is known for it's crossover elements, to the point where Link himself appeared in Soul Calibur 2 to cross blades against Nightmare!
But if you're looking for something a bit meatier rather than conjecture of how he'd be a good fit: The Power of Six theory has the answer
The short version is a theory that all DLC fighters were intended to have six Mii costumes be released along side them, some new ones including returning costumes from Smash 4. Joker fits this pattern, but somewhere along the way plans changed and the order of costumes released shuffled around, with some costumes being moved away where they should be, like Geno and Chocobo Hat's abscence from Hero's release for example
Heihachi's costume would have been a natural fit to release with Terry since they're all fighting games, but he's gone too
Now with Nightmare in the picture, the missing Smash 4 costumes would be IDEAL to release with him: We're missing Monster Hunter, Gil, Heihachi, and Lloyd. What do all of these have in common? Sword Wielders and Namco. Not to mention Lloyd AND Heihachi have both made guest apperances in Soul Calibur as well!
Also, it would sort of perfectly balance the Fighter's Pass: Two JRPGS, one big request, Two Fighting Games
All in all, it seems like Nightmare could be the surprise pick no one saw coming! But then again, Nightmares always appear when you least expect them