November 13, 2024 • 33 mins
Lauren Basmadjian, Carlyle's Global Head of Liquid Credit, joins The CLO Investor podcast to discuss rate cuts, her outlook for CLO spreads, loan default and recoveries, and how she thinks about investing in CLOs managed by other managers.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:05):
- Hi, I'm Shiloh Bates
and welcome to the CLO Investor Podcast.
CLO stands for CollateralizedLoan obligations,
which are securities backedby pools of leveraged loans.
In this podcast, we discuss current news
and the CLO industry, and Iinterview key market players.
Today I'm speaking with LaurenBama, Carlisle's Global Head
(00:28):
of Liquid Credit, whereshe oversees 53 billion
of assets under management.
The Federal Reserve began itscutting cycle in September
with a 50 basis point cut,
and so far has come down almosttwice that from its ties.
So we discuss how that isexpected to affect our industry.
We also discuss her outlook forCLO o Spreads, loan defaults
(00:51):
and recoveries, and
how she thinks aboutinvesting in CLOs managed
by other managers.
If you're enjoying thepodcast, please remember
to share like and follow.
And now my conversation with Lauren Ian.
Lauren, thanks so muchfor coming on the podcast.
(01:13):
- Happy to be here.- Why don't you tell our listeners a
little bit about your background
and how you became a CLO manager?
- Sure. So I started in 2001at a place called OC on Credit
Investors, which is a boutique
below investment gradecorporate credit firm, one
of the oldest CLO managers.
I've spent 19 years there
(01:35):
before I came to Carlisle torun the liquid credit platform.
And today I run the liquidcredit platform globally
for Carlisle, which is about $53 billion
of assets under management.
The vast majority of whichare CLOs that are managed
by Carlisle or that we investedin other managers as well.
And we are the oldestpiece of Carlisle credit,
(01:57):
so also established in 1999
and the largest liquid CLO manager.
- So how many CLOs doyou guys usually print
or create in a year?
- So it definitely depends on the year.
This year will be a recordyear for us, most likely
between new issue resets and refinancings.
(02:17):
We've already done 23 CLOs this year.
Our record was 25 in 2021.
- Is that high number just
because financing costs areattractive today in your view,
is that the key driver?
- That is certainly one of them.
When you think abouthow wide liabilities got
after Ukraine,
it really made resetting deals impossible
(02:40):
because you were gonna increaseyour weighted average cost
of debt for the most part.
So in a way you have twoyears of a backlog of resets
and that's part of what'sled to such an active year
for issuance this year.
It's not just new issue,
but as liability spreadscompressed pretty immediately in
January of 2024, resetsstarted to make sense again
(03:02):
and we had a lot of dealsin the backlog for that.
- Well, I've been in the backlog as well
and it's good to work throughsome of those deals for sure.
So you've been in themarket for a long time.
I mean, what's one or twothings that you find interesting
or unique about the CLO market
- In general?
One of the most interesting things,
and you could probably attest
to this is though it is atrillion dollar market, so large
(03:26):
and liquid, it still doesfeel like it has a niche feel
to it where not everyone invests in CLOs.
And I think there's probablysome reasons for that.
There are associatedwith CDOs, for example,
but CLOs did not blow up the economy
during the financial crisis.
But they're also complex
and there's no standardized documents.
So it takes more time toanalyze the investments
(03:47):
and you really have toinvest in staff to do that.
And so even though it'sa large liquid market,
there are many investors thatdon't have an allocation.
- Yeah, it's funny, whenI go to CLO conferences,
I just see the, even thoughthe market's grown so much,
I really just see a lotof the same players.
- Absolutely.- Supposedly the market's growing in
(04:08):
investors as well as a UM,
but I just see a lot of thesame folks and that's it.
I think for me, like one of the things
that's pretty interesting aboutthe market is just you can
buy, for example, CLOequity in the primary
or the secondary market,
and at times these twomarkets just trade at
totally different yields.
So a lot of times primary isa lot tighter than secondary
(04:31):
and anybody would be able
to get better risk adjusted returns
by buying in the secondary for sure.
But I think one of thethings that accounts
for the difference is just
that the primary processis really the fun process.
That's the one where we'reall working together,
we've got a managerand there's a warehouse
and we're trying to getthe best debt execution
and we're commenting on docs.
(04:52):
And for most people, especiallynewer to the CLO market,
I think that's the processthat's gonna feel good to them.
Whereas in the secondary, the CLO exists,
some broker dealers offering it to you
and really the only thingto negotiate is a price.
And most people probablyassume the dealer in
between is taking a fair amountof economics for themselves.
(05:13):
I think that just pushes alot of people to the primary.
- Yeah, and I think we've also seen
with the slowdown in CLO issuance in 2022
into 23, there was a veryspecific profile in the secondary.
It was either a reallyhigh weighted average cost
of debt profile that youcould buy and plan on a reset
(05:34):
or repricing or deals that were close
to ending the reinvestment period
or had a shorter reinvestment period left.
So in order to diversify yourmaturity wall of investing,
I think a number of investorscame back to primary
where they were gonna getfive year reinvestments
and diversify their book a little bit.
I think that especially withthe cleaner pools led to some
(05:56):
of that new issue demandthat we're seeing this year.
- Are there any profiles of equity
that you think have workedout particularly well?
One that comes to mind wouldbe for me, any CLO that ramped
during a period of stress whereloans were bought cheaply,
- A hundred percent couldnot agree with you more.
I think that we'retrained to think of CLOs
as an arbitrage product
(06:17):
- Note by arbitrage.
Lauren is referring to a CLOwhere the equity is owned
by a third party looking
for favorable risk adjusted returns.
- Most of the time they are,
but they're also an amazing way
to buy discounted loansin long-term, non-market
to market financing.
And if you could closeyour eyes when the cost
(06:38):
of debt's really high
and just say, we're gonnabuy good assets cheap
and eventually we trust thatthe market's gonna come back
and we'll reprice our liabilities,
I think those are the best deals.
- Agreed. And those dealsare good both in the primary
and then often are sold
and then secondary toat compelling prices.
So Carlisle is obviouslyone of the biggest managers
(07:00):
or biggest, I guess depending on
how you do the cut or the stat.
How do you think yourplatform is differentiated?
- There's a couplethings. One is we are one
of the oldest managers, so youcould look at our performance
through multiple cycles, even back to.com,
bust financial crisis,energy, Ukraine, inflation.
So you could see how we've performed too
(07:21):
because we're big, we'veinvested behind it.
So we have over 20 analystsin the US over 10 in Europe.
We have a five person restructuring team,
which I think is a keydifferentiator going forward.
And we're able to do itbecause we have the financial
wherewithal to invest in the resources.
I think that's going toaffect outcomes going forward,
especially as we move outof the bankruptcy court
(07:43):
and into this liability management
paradigm that we're living in.
We also are very connectedinternally at Carlisle
and we use the one Carlisle network in our
diligence and our tracking.
Coming from a boutique manager,
it's really different for me.
It's amazing the access youhave to deal professionals
to strategic advisors.
(08:04):
Just being able to geton the phone with people
who know the industryknow management teams
or even our Washington resources.
It just really is thisone Carlisle network.
It sounds like a buzzword candidly.
I thought that's whatit was when I read about
it before I came over.
But the connectivity is really strong
and we're all looking
to help each other inour investment decisions.
(08:25):
- Is part of that that whenyou're looking at a new loan
opportunity, if it's a leveraged buyout,
that it's very likely
that Carlisle's PE teamhas looked at the company
and already formed a view that's part
of your credit research and analysis?
- It is. We may have looked at it
or we may own a similar company.
It's all compliant. Chaperone.
(08:45):
- With you guys, issuing so many CLOs,
can there ever be too many
or do you ever hit a point
where there's maybe just not enough demand
for your CLO liabilities regardless
how well you guys are doing on the assets?
- I would think of usrelative to the market.
So the market has stoppedgrowing right now.
I actually think it willgrow again next year.
But I would think of usrelative to the market
(09:07):
and as well,
CLOs traditionally taketwo weeks to price.
And I think part of
that is this non-standardizeddocumentation,
which is not going to change.
But I think as a market weneed to become more efficient
with a quicker process in the primary
or multiple processes at the same time.
If that doesn't happen, thenI think there is a cap to
(09:29):
how many total transactions you could do.
And we're probably nearingthat gap this year.
- Okay. And that's becauseyou just don't want
to be in the marketwith overlapping deals.
You wanna get one done move on
and then the market opensback up to you again,
that's how you think about it.
- Our equity investors generallydon't want us to do that
unless we have a clearpath for bespoke pricing.
(09:52):
And we are finding those paths today
where perhaps we're syndicatingaaas in the US in one deal,
but have a hundred percentbuyer in Japan for another deal.
So they're not competing.
And I think being able toidentify separate paths is the way
that you could bring more thanone deal at a time to market.
- So the Fed cut by 50 bipsin September, does that matter
(10:17):
to you at all in terms of CLO issuance
or the performance ofthe underlying loans?
- Yeah, rates coming down matters.
What I'd say is that we'realready down about 80 basis
points in SOR and that's gonnaflow through to our borrowers
who mostly have floating rate debt.
Some of it's hedged, but you'regonna start to see that come
through in the fourth quarter.
(10:38):
And if you see furtheranticipation of cuts,
SOFR likely comes downeven before the cut.
And that's real cashbenefit to our companies.
I think that also leads to less downgrades
or dare I say, even upgrades eventually
for the underlying loan borrowers.
So those are the positives.
(10:58):
There is an effect to CLOequity with rates coming down.
CLO equity has benefitedfrom a higher base rate,
but we all use the forwardcurve in our modeling.
And so right now we'relooking at terminal rates
around 3.5% in our models.
To me it's a question of is it higher
or lower than what thecurve is expecting versus
(11:20):
how many more cuts because thecurve is anticipating cuts,
which is then flowing throughinto the CLO equity pricing.
- Yeah, I do a fair amount of education
with our investors on this.
And then the idea is thatwhen you buy CLO equity,
it's a string of cash flows
and to model that, you'relooking at a forward curve.
So we're already budgeting for the fact
(11:43):
that rates are expected to come down.
That's already in the projection.
It's already been in theprojection for some time,
which is very different fromlike owning loans directly.
When rates come down, you just get less I
income and that's it.
There's no forward projectionor anything like that.
And I guess the other part of it,
the other thing we're reservingfor in CLO equity is just
that we assume that, Ithink most people assume 2%
(12:05):
of the loans will default each year
and the recovery will bearound 70, maybe a little short
of 70 depending, but is two
and 70, are those numbers from the past
or do you think those are numbers
that you can still hit? Orhow do you think about it?
- I think it's numbers from the past,
but probably for maybea different reason than
what people are anticipating.
(12:26):
There are very few incourt bankruptcies now
and where a lot of streetanalysts expected us to jump to
three, four, 5% after Ukraine.
It didn't happen, right?
And today we're around 80 basis points,
but what's happened in the last year
and a half is distressedexchanges, discount capture,
(12:46):
liability management,whatever you wanna call it,
where a borrower comes to you
and says, Hey, your creditagreement's really loose.
We'd like you to give us some discount.
Us as equity, we're nottaking a loss before you.
Are you debt holder?
You're gonna take the loss
and then you could close up the document
and I won't strip assets for you.
I won't dilute the valueof your collateral.
(13:08):
And so that's become commonplace
before you had transactionsthat offended everyone
and we all knew the names,it was J Crew or Chewy,
and we all talk aboutthem with brand names,
but there's been dozens of those now.
And so when I think aboutit, I think there's more
that's going to be out of court.
I think bankruptciesare going to be fewer,
(13:31):
so we won't be at an averagetwo 3% going forward.
What I'd say if there'sany positive to that is
that companies aregenerally asking for outside
of court is very different
and a much lower impairment rate than
what we've seen historicallyfor bankruptcies.
So on average, the rangethat you're usually seeing
(13:52):
for the discount
or the impairment out of courthas generally been around two
to 20 cents with theaverage a little over 10.
So I think you almost have tothink about a higher percent
when you include the out court stuff,
but also a higher recovery
because you're not taking thesame type of haircut off this.
- So if I'm modeling CLO equityand I use a 2% default rate
(14:16):
and a 30% loss given default,so that's like 60 bips
and that's really the key number,
like I hope it's lower than 60,
but whichever way
of the two variables weget there is fine by me.
Do you think 60 is optimisticover the next year or two
or how do you think about that?
- I think it's realistic,
but here's this other thingabout the difference in
(14:37):
how the market is changing is
before, if you owned a loan,you got the same recovery,
no matter what manager ownedit, manager A owns a loan,
manager B owns a loan, andthey both get 60 cents back.
And with more of theseout of court processes,
you are seeing groups that areput together to be a majority
(14:57):
and be able to extract more value
and better recoveries out of the process.
Generally speaking,these are larger managers
that are important tobankruptcy advisors, companies,
sponsors, or they just havethe right to be in there
because they're so big andthey're a top five holder.
So I do think that the best thing
to do is just avoid the bad credits,
(15:18):
but that's very difficultto do in totality.
The second best thing to dois get in the right groups.
And so you could see that 60basis points maybe even if they
own the same loan, same exactloan by different managers.
You can see some managershave a 20 point swing on
recoveries based on whatgroups they get into.
- Do you think on theseout court restructurings
(15:38):
that there's a differencein private equity firm DNA
and that some naturally aregonna gravitate towards trying
to get their first lienlenders to take a discount
and others maybe are more old school
and that's just not how they'rethinking about the agreement
between debt inequity?
- I think that
before there were a lot of sponsors
(16:01):
that were worried aboutbeing viewed as a bad actor
and what would that mean asthey continue to do deals
and their access to capital.
I think unfortunately theadvisors in general have done a
really good job of convincing companies
and sponsors that this is common practice
and it's not gonna be viewedas egregious if they did it
with all of their companiesor half of their companies.
(16:23):
Sure, that's a problem.
They may be cut out of themarket, but to have one, two
or three, it's acceptable.
And so I think sure, they'reprobably a select group
of sponsors that stillview lenders as partners,
but for the most part I think that's done.
- I think I've heard likeone private equity firm say
that actually they think it'stheir fiduciary responsibility
(16:44):
to try to put it to the lenders when they
can. It's like, oh wow.
- To preserve the equity. Right.
They're fighting for the equity.I have heard that as well.
- It's an interestingway to think about it.
So I imagine aroundCarlisle you buy a lot of,
or your firm buys a lotof CLO securities, many
that are not managed directlyby you. Is that correct?
(17:05):
- That's correct.- Are you involved in that process?
- Yeah, I sit on theinvestment committee for that.
- Okay. And how do you thinkabout what's interesting to you
and what managers youwanna partner with in that?
- So we have a team betweenstructures, traders, analysts
that are looking at thirdparty opportunities.
So buying debt or equityand other managers, CLOs.
(17:28):
One of the things that we dois a deep dive on the portfolio
because we do lend to a lot of companies
and we have this hugeresearch team, so we try
to incorporate their views.
We even look at our viewof warf, meaning, we'll,
we have our own rating system.
- WARF is the weightedaverage rating factor,
- Right?
The Moody's equivalent,the numerical equivalent
(17:49):
of the letter rating.
And then we create a Carlisle one
and say, well,
our analyst team thinksthis portfolio's riskier
or safer than what the market is seeing.
And we're using our name byname analysis to do that.
So that's one thing. But I'dsay in general we wanna see
consistency of performance.
I mean, as you put togethera portfolio of investments,
(18:10):
we're buying certain managersfor their attributes.
Maybe one is a lower spread manager,
but we think is really stable,
great historical default rates.
And then we have anothermanager that we think is Alpha
where they do take more risk,
but we get compensated inthe total return for that.
What we get concerned about iswhen we see style drift from
(18:31):
managers and that's whatwe try to identify early.
- What securities generallywork for you guys at Carlisle?
Are you putting equity anddouble Bs into GPLP funds or?
- Yeah, so we have a number of funds
that invest across the capital stack.
I'd say that it looks morelike SMAs for investment grade,
(18:52):
but we have retail productsfor lower tranches.
So we have a fund called ctac,
which is a cross platformcredit product at Carlyle.
But part of that fund isCLO equity and CO double Bs.
We have a public equityfund that is CLO equity.
So we find different fundstructures work better depending
(19:12):
on the tranche and we try
to marry the liquidity needsthe investor needs by fund
with the right end investment
- To do like a prettyheavy overlay I imagine,
where you just look at somebody else's CLO
and just kind of determine,hey, what percentage
of these loans are approved byyou or sitting in your CLOs.
I imagine that weighs pretty heavily.
(19:33):
- We do. We have to becareful to just think
that our views always right
and just buy the loans again that we like.
But yes, absolutely.
I think it's actuallymore helpful on the bad
loans, if that makes sense.
So things that we passed on
or think could have trouble
with the price doesn't reflect that yet.
And maybe we do own that loan
and that could be the case too.
(19:54):
But I think that it's reallyidentifying that tail risk
that makes more of adifference in saying yes,
these 100 credits are totally fine.
- So a substantial majority
of my investments arein middle market CLOs.
Is that something that you're involved in?
- Yeah, and that's suchan interesting space
'cause it's growing rapidly where the rest
of the CLO O space is alittle stagnant right now.
(20:17):
Traditionally, as you know,you've had most of CLO equity
that's for middle market orprivate credit CLOs be captive
or financing trades
and you would place the debt
through more traditional routes.
Still today, a lot of middle market CLOs
or private credit CLOsare financing trades,
but you're seeing thirdparty equity interest
(20:38):
because the cash flows are better
because the arbitrageis much more robust than
in liquid credit CLOs.
So we are looking at that.
We've issued a privatecredit CLO this year,
but it's been a financing trade.
We've done another reset of existing one,
but we are taking a look at
what a third party model lookslike for private credit CLOs.
(21:01):
Meaning should we beissuing private credit CLOs
with investors like you?
- You should be. That's my opinion.
Are you involved in that?
So the selection of middlemarket loans for CLOs
around your platform, is that something
that you're also involved inor is that a separate team?
(21:21):
- So is a separate team.
We have a totally separateanalyst team for direct lending
and private credit.
Our teams talk a ton
and you've seen more movementof loans between the two,
more idea generation between the two.
But there's a fully built outdirect lending team that said,
I do sit on the investment committee
for private credit as well.
(21:41):
So I am approving theloans that we're buying,
but the team doesn't report into me.
It's really a collaborativeeffort across the platform.
And also it's reallybeneficial for me to see
as a liquid investor what'shappening in the private markets
and it gives me an idea ofwhat could be refinanced there,
for example, or what kind of profile
of loans they're looking for.
(22:01):
So I joined maybe two years ago
and I think it's been really additive
to my thought process wheninvesting in liquid credit,
- Was it kind of a littlebit of a shock or a surprise?
If you go from liquidcredit where I don't know,
the EBDA numbers
for a borrower might bea hundred million plus
and then you find yourself somewhere
where people are making loansat like 20 million of ebitda,
(22:25):
maybe with better covenants, maybe
with a better LTV and better docs
- Note LTV means loan to value
and Shiloh should know betterthan using three letter
acronyms in his podcast.
- But still the difference incompany size is substantial.
Is that kind of an easything to get your head around
or how did you think about that?
- So no one's ever asked methat question. It is so hard.
(22:49):
It was hard for me tolook at these companies
and say, how do you lend to acompany that's like you said,
$20 million and buy and hold it.
- Yeah, no liquidity.
- That's right. Wherein liquid markets, one,
the average EBITDA accompaniesa billion dollars at this
point, and two,
I could sell it if I changed mymind or all these things changed.
(23:10):
So how do you underwrite to buy and hold?
And that did take me a while.
It took me at least afew months to get used
to looking at the deals,thinking about them differently.
I will say there's adifferent level of information
that you could get diligence.
Obviously the documents are way better
and tighter than you see in liquid.
There's still a relationship with sponsors
(23:31):
that I think we've lost in the BSL market.
And so when we were going through Covid
and then inflation, what was very clear is
that we were seeing a lot moreequity checks come in into
direct lending from sponsors
to support the companiesthan really I've ever seen
in the liquid market.
So I think I had to get used
to looking at those smaller companies,
(23:52):
but also with a lens ofall the extra protections
that we get by doing that.
- What do you think is a good premium
to get paid if the loanhas no liquidity at all
and you're gonna hold it tomaturity versus having kind
of the broadly syndicated liquidity?
What do you think that'sworth in basis points?
- So today I'd say we'reat let's say three 50
(24:13):
for the liquid market
and you're seeing privatecredit go down to 500, 5 25
for good credits.
- Note those numbers werespreads over SOFR in basis points
- And that does feel a little tight.
Now we're both repricing,
so the spread may change shortly again,
(24:35):
but I think that you wouldgenerally want at least 200 basis
points for that illiquidity premium.
It's illiquidity and size.
Maybe I'm still stuck on that size thing
that you asked about in the last question
because I think that there are some
of these hybrid private credit BSL issuers
that they have a billion dollars of EBITDA
(24:56):
and they're really big companies,
but they chose to accessthe private credit market.
I think those probably should have less
of a spread premium than thetrue middle market universe.
- Is there anything else happening in CLOs
or your platform that you think would be
interesting to discuss?
- I think the most interestingthing is just the continued
evolution of these liabilitymanagement exercises.
(25:17):
To me, we went from acovenanted market to cove light
after the financial crisis.
And this is the next sea change for me
where we went from a ifyou you had a problem,
you're doing it in court
to now seeing even if you don'thave a huge problem doing it
out of court and seeing ourdocuments used against us
to advance more moneyif a company needs it
(25:38):
or take a discount capture.
So I think that's the big theme out there.
What I would say that'spositive is we lend
to 600 companies in theUS over 200 in Europe.
Our data's pretty good,
I think probably better than index data
'cause we see so many private companies
and the resilience has been impressive.
As we've said, thecompanies have been through
(25:59):
so much in the last four years
below investment grade corporatecredit should be really
hurt by higher interest rates
because they have a lotof floating rate debt.
And we've seen thepercentage of our companies
that produce cash flow is wayhigher today than it was a
couple years ago, likein 2021 for example,
which seems counterintuitive
because rates are so muchhigher and growth has slowed,
(26:20):
but it's because companiesare focused on it
and it's amazing that whenmanagement teams focus,
they can start to produce cash flow.
They're figuring out howto become more efficient,
maybe cut back on cap X or hiring,
but about 70%
of our companies are producingfree cash flow in this
higher rate environment.
We haven't seen third quarter numbers yet,
(26:40):
but for the second quarter,average growth of about 5%
and average EBITDA growth of 10%.
So I think there's been prettyresilient market in the face
of a lot of negativity of downgrades
and distressed exchanges,
but companies are figuring out a way
for the most part to make it work.
- One last question. Do you expect
(27:01):
that CLO liabilities will continue
to contract here going into year end
or you're kind of in the middle of a lot
of these conversations? I imagine
- I do.
There's so much to apply.
So I think it would betightening much further if there
wasn't as much supply.
But that said, AAA is havehad negative issuance,
net issuance because the paydowns have been so intense
(27:24):
for AAA buyers year todate from amortization
of post reinvestment perioddeals and call deals and resets
and refinancings.
So I think as that market has shrunk
and it's performed really well,we'll see continued demand
to redeploy that money
and I think that leads
to continued tighter spreads especially.
(27:45):
And then the rest of the stack, usually
CLOs figure out a way towork and loans are repricing.
About half of our portfoliohas repriced year to date
with an average reduction inspread of 44 basis points.
That means we lost 22 basispoints on average in spread
liabilities have to repricetoo to make the arbitrage work.
- That's right. Great.
(28:06):
Well, Lauren, thanks somuch for coming on the
podcast. It was great to talk to you.
- It was a pleasure. I reallyappreciate you inviting me.
- The content here is forinformational purposes only
and should not be takenas legal business tax
or investment advice
or be used to evaluate anyinvestment or security.
(28:28):
This podcast is notdirected at any investment
or potential investorsin any Flat Rock Global
Fund definition.
Section A UM refers toassets under management, LMT
or liability managementtransactions are an out
of court modification of acompany's debt Layering refers
to placing additional debt with a priority
(28:49):
above the first lien term loan.
The secured overnight financing rate,
SOFR is a broad measure of the cost
of borrowing cash overnight collateralized
by treasury securities.
The global financialcrisis GFC was a period
of extreme stress inglobal financial markets
and banking systems betweenmid 2007 and early 2009.
(29:11):
Credit ratings areopinions about credit risk
for long-term issues or instruments.
The ratings lie on a spectrumranging from the highest
credit quality on one end todefault or junk on the other.
AAA is the highest credit quality A C
or D depending on the agencyissuing the rating is the
lowest or junk quality.
Leveraged loans arecorporate loans to companies
(29:34):
that are not ratedinvestment grade broadly.
Syndicated loans areunderwritten by banks, rated
by nationally statisticalratings organizations,
and often traded by market participants.
Middle market loans areusually underwritten
by several lenders with the intention
of holding the investment
through its maturity spread isthe percentage difference in
(29:55):
current yields of various classes
of fixed income securitiesversus treasury bonds
or another benchmark bond measure.
Our set is a refinancing
and extension of A CLO investment period.
EBIT DA is earnings beforeinterest, taxes, depreciation,
and amortization.
An add back wouldattempt to adjust EBIT DA
for non-recurring items.
(30:17):
ETF are exchange traded funds.
Lior, the London Interbankoffer rate was replaced
by software on June 30th, 2024.
Deliver means reducing theamount of debt financing.
High yield bonds arecorporate borrowings rated
below investment gradethat are usually fixed rate
and unsecured default refers
(30:39):
to missing a contractualinterest or principle payment.
Debt has contractual interest principle
and interest payments,
whereas equity representsownership in a company.
Senior secured corporate loansare borrowings from a company
that are backed by collateral.
Junior debt ranks
behind senior secure debtin its payment priority.
(31:01):
Collateral pool refers tothe sum of collateral pledge
to a lender to support its repayment.
A on-call period refers
to the time in which adebt instrument cannot be
ally repaid.
A floating rate investment hasan interest rate that varies
with an underlying floating rate index.
General disclaimer section.
(31:23):
References to interestrate moves are based on
Bloomberg data.
Any mentions of specific companies are
for reference purposes only
and are not meant to describethe investment merit of
or potential or actualportfolio changes related
to securities of those companiesunless otherwise noted.
All discussions are based onUS markets and US monetary
(31:45):
and fiscal policies.
Market forecasts
and projections are basedon current market conditions
and are subject to change without notice,
projections should not beconsidered a guarantee.
The views and opinions expressed
by the Flat Rock global speakerare those of the speaker as
of the date of the broadcast
and do not necessarily represent the views
(32:06):
of the firm as a whole.
Any such views are subject
to change at any time basedupon market or other conditions
and Flat Rock Globaldisclaims any responsibility
to update such views.
This material is notintended to be relied upon
as a forecast, research,or investment advice.
It is not a recommendationoffer or solicitation to buy
(32:28):
or sell any securities or toadopt any investment strategy.
Neither Flat Rock Global
nor the Flat Rock GlobalSpeaker can be responsible
for any direct or incidentalloss incurred by applying any
of the information offered.
None of the information
provided should be regardedas a suggestion to engage in
or refrain from any investmentrelated course of action
(32:50):
as neither Flat Rock Global
nor its affiliates are undertaking.
To provide impartialinvestment advice, act
as an impartial advisor
or give advice in a fiduciary capacity.
Additional informationabout this podcast along
with an edited transcript may be obtained
by visiting flat rock global.com.
- Hi, I'm Shiloh Bates
and welcome to the CLO Investor Podcast.
CLO stands for CollateralizedLoan obligations,
which are securities backedby pools of leveraged loans.
In this podcast, we discuss current news
and the CLO industry, and Iinterview key market players.
Today I'm speaking with LaurenBama, Carlisle's Global Head
(00:28):
of Liquid Credit, whereshe oversees 53 billion
of assets under management.
The Federal Reserve began itscutting cycle in September
with a 50 basis point cut,
and so far has come down almosttwice that from its ties.
So we discuss how that isexpected to affect our industry.
We also discuss her outlook forCLO o Spreads, loan defaults
(00:51):
and recoveries, and
how she thinks aboutinvesting in CLOs managed
by other managers.
If you're enjoying thepodcast, please remember
to share like and follow.
And now my conversation with Lauren Ian.
Lauren, thanks so muchfor coming on the podcast.
(01:13):
- Happy to be here.- Why don't you tell our listeners a
little bit about your background
and how you became a CLO manager?
- Sure. So I started in 2001at a place called OC on Credit
Investors, which is a boutique
below investment gradecorporate credit firm, one
of the oldest CLO managers.
I've spent 19 years there
(01:35):
before I came to Carlisle torun the liquid credit platform.
And today I run the liquidcredit platform globally
for Carlisle, which is about $53 billion
of assets under management.
The vast majority of whichare CLOs that are managed
by Carlisle or that we investedin other managers as well.
And we are the oldestpiece of Carlisle credit,
(01:57):
so also established in 1999
and the largest liquid CLO manager.
- So how many CLOs doyou guys usually print
or create in a year?
- So it definitely depends on the year.
This year will be a recordyear for us, most likely
between new issue resets and refinancings.
(02:17):
We've already done 23 CLOs this year.
Our record was 25 in 2021.
- Is that high number just
because financing costs areattractive today in your view,
is that the key driver?
- That is certainly one of them.
When you think abouthow wide liabilities got
after Ukraine,
it really made resetting deals impossible
(02:40):
because you were gonna increaseyour weighted average cost
of debt for the most part.
So in a way you have twoyears of a backlog of resets
and that's part of what'sled to such an active year
for issuance this year.
It's not just new issue,
but as liability spreadscompressed pretty immediately in
January of 2024, resetsstarted to make sense again
(03:02):
and we had a lot of dealsin the backlog for that.
- Well, I've been in the backlog as well
and it's good to work throughsome of those deals for sure.
So you've been in themarket for a long time.
I mean, what's one or twothings that you find interesting
or unique about the CLO market
- In general?
One of the most interesting things,
and you could probably attest
to this is though it is atrillion dollar market, so large
(03:26):
and liquid, it still doesfeel like it has a niche feel
to it where not everyone invests in CLOs.
And I think there's probablysome reasons for that.
There are associatedwith CDOs, for example,
but CLOs did not blow up the economy
during the financial crisis.
But they're also complex
and there's no standardized documents.
So it takes more time toanalyze the investments
(03:47):
and you really have toinvest in staff to do that.
And so even though it'sa large liquid market,
there are many investors thatdon't have an allocation.
- Yeah, it's funny, whenI go to CLO conferences,
I just see the, even thoughthe market's grown so much,
I really just see a lotof the same players.
- Absolutely.- Supposedly the market's growing in
(04:08):
investors as well as a UM,
but I just see a lot of thesame folks and that's it.
I think for me, like one of the things
that's pretty interesting aboutthe market is just you can
buy, for example, CLOequity in the primary
or the secondary market,
and at times these twomarkets just trade at
totally different yields.
So a lot of times primary isa lot tighter than secondary
(04:31):
and anybody would be able
to get better risk adjusted returns
by buying in the secondary for sure.
But I think one of thethings that accounts
for the difference is just
that the primary processis really the fun process.
That's the one where we'reall working together,
we've got a managerand there's a warehouse
and we're trying to getthe best debt execution
and we're commenting on docs.
(04:52):
And for most people, especiallynewer to the CLO market,
I think that's the processthat's gonna feel good to them.
Whereas in the secondary, the CLO exists,
some broker dealers offering it to you
and really the only thingto negotiate is a price.
And most people probablyassume the dealer in
between is taking a fair amountof economics for themselves.
(05:13):
I think that just pushes alot of people to the primary.
- Yeah, and I think we've also seen
with the slowdown in CLO issuance in 2022
into 23, there was a veryspecific profile in the secondary.
It was either a reallyhigh weighted average cost
of debt profile that youcould buy and plan on a reset
(05:34):
or repricing or deals that were close
to ending the reinvestment period
or had a shorter reinvestment period left.
So in order to diversify yourmaturity wall of investing,
I think a number of investorscame back to primary
where they were gonna getfive year reinvestments
and diversify their book a little bit.
I think that especially withthe cleaner pools led to some
(05:56):
of that new issue demandthat we're seeing this year.
- Are there any profiles of equity
that you think have workedout particularly well?
One that comes to mind wouldbe for me, any CLO that ramped
during a period of stress whereloans were bought cheaply,
- A hundred percent couldnot agree with you more.
I think that we'retrained to think of CLOs
as an arbitrage product
(06:17):
- Note by arbitrage.
Lauren is referring to a CLOwhere the equity is owned
by a third party looking
for favorable risk adjusted returns.
- Most of the time they are,
but they're also an amazing way
to buy discounted loansin long-term, non-market
to market financing.
And if you could closeyour eyes when the cost
(06:38):
of debt's really high
and just say, we're gonnabuy good assets cheap
and eventually we trust thatthe market's gonna come back
and we'll reprice our liabilities,
I think those are the best deals.
- Agreed. And those dealsare good both in the primary
and then often are sold
and then secondary toat compelling prices.
So Carlisle is obviouslyone of the biggest managers
(07:00):
or biggest, I guess depending on
how you do the cut or the stat.
How do you think yourplatform is differentiated?
- There's a couplethings. One is we are one
of the oldest managers, so youcould look at our performance
through multiple cycles, even back to.com,
bust financial crisis,energy, Ukraine, inflation.
So you could see how we've performed too
(07:21):
because we're big, we'veinvested behind it.
So we have over 20 analystsin the US over 10 in Europe.
We have a five person restructuring team,
which I think is a keydifferentiator going forward.
And we're able to do itbecause we have the financial
wherewithal to invest in the resources.
I think that's going toaffect outcomes going forward,
especially as we move outof the bankruptcy court
(07:43):
and into this liability management
paradigm that we're living in.
We also are very connectedinternally at Carlisle
and we use the one Carlisle network in our
diligence and our tracking.
Coming from a boutique manager,
it's really different for me.
It's amazing the access youhave to deal professionals
to strategic advisors.
(08:04):
Just being able to geton the phone with people
who know the industryknow management teams
or even our Washington resources.
It just really is thisone Carlisle network.
It sounds like a buzzword candidly.
I thought that's whatit was when I read about
it before I came over.
But the connectivity is really strong
and we're all looking
to help each other inour investment decisions.
(08:25):
- Is part of that that whenyou're looking at a new loan
opportunity, if it's a leveraged buyout,
that it's very likely
that Carlisle's PE teamhas looked at the company
and already formed a view that's part
of your credit research and analysis?
- It is. We may have looked at it
or we may own a similar company.
It's all compliant. Chaperone.
(08:45):
- With you guys, issuing so many CLOs,
can there ever be too many
or do you ever hit a point
where there's maybe just not enough demand
for your CLO liabilities regardless
how well you guys are doing on the assets?
- I would think of usrelative to the market.
So the market has stoppedgrowing right now.
I actually think it willgrow again next year.
But I would think of usrelative to the market
(09:07):
and as well,
CLOs traditionally taketwo weeks to price.
And I think part of
that is this non-standardizeddocumentation,
which is not going to change.
But I think as a market weneed to become more efficient
with a quicker process in the primary
or multiple processes at the same time.
If that doesn't happen, thenI think there is a cap to
(09:29):
how many total transactions you could do.
And we're probably nearingthat gap this year.
- Okay. And that's becauseyou just don't want
to be in the marketwith overlapping deals.
You wanna get one done move on
and then the market opensback up to you again,
that's how you think about it.
- Our equity investors generallydon't want us to do that
unless we have a clearpath for bespoke pricing.
(09:52):
And we are finding those paths today
where perhaps we're syndicatingaaas in the US in one deal,
but have a hundred percentbuyer in Japan for another deal.
So they're not competing.
And I think being able toidentify separate paths is the way
that you could bring more thanone deal at a time to market.
- So the Fed cut by 50 bipsin September, does that matter
(10:17):
to you at all in terms of CLO issuance
or the performance ofthe underlying loans?
- Yeah, rates coming down matters.
What I'd say is that we'realready down about 80 basis
points in SOR and that's gonnaflow through to our borrowers
who mostly have floating rate debt.
Some of it's hedged, but you'regonna start to see that come
through in the fourth quarter.
(10:38):
And if you see furtheranticipation of cuts,
SOFR likely comes downeven before the cut.
And that's real cashbenefit to our companies.
I think that also leads to less downgrades
or dare I say, even upgrades eventually
for the underlying loan borrowers.
So those are the positives.
(10:58):
There is an effect to CLOequity with rates coming down.
CLO equity has benefitedfrom a higher base rate,
but we all use the forwardcurve in our modeling.
And so right now we'relooking at terminal rates
around 3.5% in our models.
To me it's a question of is it higher
or lower than what thecurve is expecting versus
(11:20):
how many more cuts because thecurve is anticipating cuts,
which is then flowing throughinto the CLO equity pricing.
- Yeah, I do a fair amount of education
with our investors on this.
And then the idea is thatwhen you buy CLO equity,
it's a string of cash flows
and to model that, you'relooking at a forward curve.
So we're already budgeting for the fact
(11:43):
that rates are expected to come down.
That's already in the projection.
It's already been in theprojection for some time,
which is very different fromlike owning loans directly.
When rates come down, you just get less I
income and that's it.
There's no forward projectionor anything like that.
And I guess the other part of it,
the other thing we're reservingfor in CLO equity is just
that we assume that, Ithink most people assume 2%
(12:05):
of the loans will default each year
and the recovery will bearound 70, maybe a little short
of 70 depending, but is two
and 70, are those numbers from the past
or do you think those are numbers
that you can still hit? Orhow do you think about it?
- I think it's numbers from the past,
but probably for maybea different reason than
what people are anticipating.
(12:26):
There are very few incourt bankruptcies now
and where a lot of streetanalysts expected us to jump to
three, four, 5% after Ukraine.
It didn't happen, right?
And today we're around 80 basis points,
but what's happened in the last year
and a half is distressedexchanges, discount capture,
(12:46):
liability management,whatever you wanna call it,
where a borrower comes to you
and says, Hey, your creditagreement's really loose.
We'd like you to give us some discount.
Us as equity, we're nottaking a loss before you.
Are you debt holder?
You're gonna take the loss
and then you could close up the document
and I won't strip assets for you.
I won't dilute the valueof your collateral.
(13:08):
And so that's become commonplace
before you had transactionsthat offended everyone
and we all knew the names,it was J Crew or Chewy,
and we all talk aboutthem with brand names,
but there's been dozens of those now.
And so when I think aboutit, I think there's more
that's going to be out of court.
I think bankruptciesare going to be fewer,
(13:31):
so we won't be at an averagetwo 3% going forward.
What I'd say if there'sany positive to that is
that companies aregenerally asking for outside
of court is very different
and a much lower impairment rate than
what we've seen historicallyfor bankruptcies.
So on average, the rangethat you're usually seeing
(13:52):
for the discount
or the impairment out of courthas generally been around two
to 20 cents with theaverage a little over 10.
So I think you almost have tothink about a higher percent
when you include the out court stuff,
but also a higher recovery
because you're not taking thesame type of haircut off this.
- So if I'm modeling CLO equityand I use a 2% default rate
(14:16):
and a 30% loss given default,so that's like 60 bips
and that's really the key number,
like I hope it's lower than 60,
but whichever way
of the two variables weget there is fine by me.
Do you think 60 is optimisticover the next year or two
or how do you think about that?
- I think it's realistic,
but here's this other thingabout the difference in
(14:37):
how the market is changing is
before, if you owned a loan,you got the same recovery,
no matter what manager ownedit, manager A owns a loan,
manager B owns a loan, andthey both get 60 cents back.
And with more of theseout of court processes,
you are seeing groups that areput together to be a majority
(14:57):
and be able to extract more value
and better recoveries out of the process.
Generally speaking,these are larger managers
that are important tobankruptcy advisors, companies,
sponsors, or they just havethe right to be in there
because they're so big andthey're a top five holder.
So I do think that the best thing
to do is just avoid the bad credits,
(15:18):
but that's very difficultto do in totality.
The second best thing to dois get in the right groups.
And so you could see that 60basis points maybe even if they
own the same loan, same exactloan by different managers.
You can see some managershave a 20 point swing on
recoveries based on whatgroups they get into.
- Do you think on theseout court restructurings
(15:38):
that there's a differencein private equity firm DNA
and that some naturally aregonna gravitate towards trying
to get their first lienlenders to take a discount
and others maybe are more old school
and that's just not how they'rethinking about the agreement
between debt inequity?
- I think that
before there were a lot of sponsors
(16:01):
that were worried aboutbeing viewed as a bad actor
and what would that mean asthey continue to do deals
and their access to capital.
I think unfortunately theadvisors in general have done a
really good job of convincing companies
and sponsors that this is common practice
and it's not gonna be viewedas egregious if they did it
with all of their companiesor half of their companies.
(16:23):
Sure, that's a problem.
They may be cut out of themarket, but to have one, two
or three, it's acceptable.
And so I think sure, they'reprobably a select group
of sponsors that stillview lenders as partners,
but for the most part I think that's done.
- I think I've heard likeone private equity firm say
that actually they think it'stheir fiduciary responsibility
(16:44):
to try to put it to the lenders when they
can. It's like, oh wow.
- To preserve the equity. Right.
They're fighting for the equity.I have heard that as well.
- It's an interestingway to think about it.
So I imagine aroundCarlisle you buy a lot of,
or your firm buys a lotof CLO securities, many
that are not managed directlyby you. Is that correct?
(17:05):
- That's correct.- Are you involved in that process?
- Yeah, I sit on theinvestment committee for that.
- Okay. And how do you thinkabout what's interesting to you
and what managers youwanna partner with in that?
- So we have a team betweenstructures, traders, analysts
that are looking at thirdparty opportunities.
So buying debt or equityand other managers, CLOs.
(17:28):
One of the things that we dois a deep dive on the portfolio
because we do lend to a lot of companies
and we have this hugeresearch team, so we try
to incorporate their views.
We even look at our viewof warf, meaning, we'll,
we have our own rating system.
- WARF is the weightedaverage rating factor,
- Right?
The Moody's equivalent,the numerical equivalent
(17:49):
of the letter rating.
And then we create a Carlisle one
and say, well,
our analyst team thinksthis portfolio's riskier
or safer than what the market is seeing.
And we're using our name byname analysis to do that.
So that's one thing. But I'dsay in general we wanna see
consistency of performance.
I mean, as you put togethera portfolio of investments,
(18:10):
we're buying certain managersfor their attributes.
Maybe one is a lower spread manager,
but we think is really stable,
great historical default rates.
And then we have anothermanager that we think is Alpha
where they do take more risk,
but we get compensated inthe total return for that.
What we get concerned about iswhen we see style drift from
(18:31):
managers and that's whatwe try to identify early.
- What securities generallywork for you guys at Carlisle?
Are you putting equity anddouble Bs into GPLP funds or?
- Yeah, so we have a number of funds
that invest across the capital stack.
I'd say that it looks morelike SMAs for investment grade,
(18:52):
but we have retail productsfor lower tranches.
So we have a fund called ctac,
which is a cross platformcredit product at Carlyle.
But part of that fund isCLO equity and CO double Bs.
We have a public equityfund that is CLO equity.
So we find different fundstructures work better depending
(19:12):
on the tranche and we try
to marry the liquidity needsthe investor needs by fund
with the right end investment
- To do like a prettyheavy overlay I imagine,
where you just look at somebody else's CLO
and just kind of determine,hey, what percentage
of these loans are approved byyou or sitting in your CLOs.
I imagine that weighs pretty heavily.
(19:33):
- We do. We have to becareful to just think
that our views always right
and just buy the loans again that we like.
But yes, absolutely.
I think it's actuallymore helpful on the bad
loans, if that makes sense.
So things that we passed on
or think could have trouble
with the price doesn't reflect that yet.
And maybe we do own that loan
and that could be the case too.
(19:54):
But I think that it's reallyidentifying that tail risk
that makes more of adifference in saying yes,
these 100 credits are totally fine.
- So a substantial majority
of my investments arein middle market CLOs.
Is that something that you're involved in?
- Yeah, and that's suchan interesting space
'cause it's growing rapidly where the rest
of the CLO O space is alittle stagnant right now.
(20:17):
Traditionally, as you know,you've had most of CLO equity
that's for middle market orprivate credit CLOs be captive
or financing trades
and you would place the debt
through more traditional routes.
Still today, a lot of middle market CLOs
or private credit CLOsare financing trades,
but you're seeing thirdparty equity interest
(20:38):
because the cash flows are better
because the arbitrageis much more robust than
in liquid credit CLOs.
So we are looking at that.
We've issued a privatecredit CLO this year,
but it's been a financing trade.
We've done another reset of existing one,
but we are taking a look at
what a third party model lookslike for private credit CLOs.
(21:01):
Meaning should we beissuing private credit CLOs
with investors like you?
- You should be. That's my opinion.
Are you involved in that?
So the selection of middlemarket loans for CLOs
around your platform, is that something
that you're also involved inor is that a separate team?
(21:21):
- So is a separate team.
We have a totally separateanalyst team for direct lending
and private credit.
Our teams talk a ton
and you've seen more movementof loans between the two,
more idea generation between the two.
But there's a fully built outdirect lending team that said,
I do sit on the investment committee
for private credit as well.
(21:41):
So I am approving theloans that we're buying,
but the team doesn't report into me.
It's really a collaborativeeffort across the platform.
And also it's reallybeneficial for me to see
as a liquid investor what'shappening in the private markets
and it gives me an idea ofwhat could be refinanced there,
for example, or what kind of profile
of loans they're looking for.
(22:01):
So I joined maybe two years ago
and I think it's been really additive
to my thought process wheninvesting in liquid credit,
- Was it kind of a littlebit of a shock or a surprise?
If you go from liquidcredit where I don't know,
the EBDA numbers
for a borrower might bea hundred million plus
and then you find yourself somewhere
where people are making loansat like 20 million of ebitda,
(22:25):
maybe with better covenants, maybe
with a better LTV and better docs
- Note LTV means loan to value
and Shiloh should know betterthan using three letter
acronyms in his podcast.
- But still the difference incompany size is substantial.
Is that kind of an easything to get your head around
or how did you think about that?
- So no one's ever asked methat question. It is so hard.
(22:49):
It was hard for me tolook at these companies
and say, how do you lend to acompany that's like you said,
$20 million and buy and hold it.
- Yeah, no liquidity.
- That's right. Wherein liquid markets, one,
the average EBITDA accompaniesa billion dollars at this
point, and two,
I could sell it if I changed mymind or all these things changed.
(23:10):
So how do you underwrite to buy and hold?
And that did take me a while.
It took me at least afew months to get used
to looking at the deals,thinking about them differently.
I will say there's adifferent level of information
that you could get diligence.
Obviously the documents are way better
and tighter than you see in liquid.
There's still a relationship with sponsors
(23:31):
that I think we've lost in the BSL market.
And so when we were going through Covid
and then inflation, what was very clear is
that we were seeing a lot moreequity checks come in into
direct lending from sponsors
to support the companiesthan really I've ever seen
in the liquid market.
So I think I had to get used
to looking at those smaller companies,
(23:52):
but also with a lens ofall the extra protections
that we get by doing that.
- What do you think is a good premium
to get paid if the loanhas no liquidity at all
and you're gonna hold it tomaturity versus having kind
of the broadly syndicated liquidity?
What do you think that'sworth in basis points?
- So today I'd say we'reat let's say three 50
(24:13):
for the liquid market
and you're seeing privatecredit go down to 500, 5 25
for good credits.
- Note those numbers werespreads over SOFR in basis points
- And that does feel a little tight.
Now we're both repricing,
so the spread may change shortly again,
(24:35):
but I think that you wouldgenerally want at least 200 basis
points for that illiquidity premium.
It's illiquidity and size.
Maybe I'm still stuck on that size thing
that you asked about in the last question
because I think that there are some
of these hybrid private credit BSL issuers
that they have a billion dollars of EBITDA
(24:56):
and they're really big companies,
but they chose to accessthe private credit market.
I think those probably should have less
of a spread premium than thetrue middle market universe.
- Is there anything else happening in CLOs
or your platform that you think would be
interesting to discuss?
- I think the most interestingthing is just the continued
evolution of these liabilitymanagement exercises.
(25:17):
To me, we went from acovenanted market to cove light
after the financial crisis.
And this is the next sea change for me
where we went from a ifyou you had a problem,
you're doing it in court
to now seeing even if you don'thave a huge problem doing it
out of court and seeing ourdocuments used against us
to advance more moneyif a company needs it
(25:38):
or take a discount capture.
So I think that's the big theme out there.
What I would say that'spositive is we lend
to 600 companies in theUS over 200 in Europe.
Our data's pretty good,
I think probably better than index data
'cause we see so many private companies
and the resilience has been impressive.
As we've said, thecompanies have been through
(25:59):
so much in the last four years
below investment grade corporatecredit should be really
hurt by higher interest rates
because they have a lotof floating rate debt.
And we've seen thepercentage of our companies
that produce cash flow is wayhigher today than it was a
couple years ago, likein 2021 for example,
which seems counterintuitive
because rates are so muchhigher and growth has slowed,
(26:20):
but it's because companiesare focused on it
and it's amazing that whenmanagement teams focus,
they can start to produce cash flow.
They're figuring out howto become more efficient,
maybe cut back on cap X or hiring,
but about 70%
of our companies are producingfree cash flow in this
higher rate environment.
We haven't seen third quarter numbers yet,
(26:40):
but for the second quarter,average growth of about 5%
and average EBITDA growth of 10%.
So I think there's been prettyresilient market in the face
of a lot of negativity of downgrades
and distressed exchanges,
but companies are figuring out a way
for the most part to make it work.
- One last question. Do you expect
(27:01):
that CLO liabilities will continue
to contract here going into year end
or you're kind of in the middle of a lot
of these conversations? I imagine
- I do.
There's so much to apply.
So I think it would betightening much further if there
wasn't as much supply.
But that said, AAA is havehad negative issuance,
net issuance because the paydowns have been so intense
(27:24):
for AAA buyers year todate from amortization
of post reinvestment perioddeals and call deals and resets
and refinancings.
So I think as that market has shrunk
and it's performed really well,we'll see continued demand
to redeploy that money
and I think that leads
to continued tighter spreads especially.
(27:45):
And then the rest of the stack, usually
CLOs figure out a way towork and loans are repricing.
About half of our portfoliohas repriced year to date
with an average reduction inspread of 44 basis points.
That means we lost 22 basispoints on average in spread
liabilities have to repricetoo to make the arbitrage work.
- That's right. Great.
(28:06):
Well, Lauren, thanks somuch for coming on the
podcast. It was great to talk to you.
- It was a pleasure. I reallyappreciate you inviting me.
- The content here is forinformational purposes only
and should not be takenas legal business tax
or investment advice
or be used to evaluate anyinvestment or security.
(28:28):
This podcast is notdirected at any investment
or potential investorsin any Flat Rock Global
Fund definition.
Section A UM refers toassets under management, LMT
or liability managementtransactions are an out
of court modification of acompany's debt Layering refers
to placing additional debt with a priority
(28:49):
above the first lien term loan.
The secured overnight financing rate,
SOFR is a broad measure of the cost
of borrowing cash overnight collateralized
by treasury securities.
The global financialcrisis GFC was a period
of extreme stress inglobal financial markets
and banking systems betweenmid 2007 and early 2009.
(29:11):
Credit ratings areopinions about credit risk
for long-term issues or instruments.
The ratings lie on a spectrumranging from the highest
credit quality on one end todefault or junk on the other.
AAA is the highest credit quality A C
or D depending on the agencyissuing the rating is the
lowest or junk quality.
Leveraged loans arecorporate loans to companies
(29:34):
that are not ratedinvestment grade broadly.
Syndicated loans areunderwritten by banks, rated
by nationally statisticalratings organizations,
and often traded by market participants.
Middle market loans areusually underwritten
by several lenders with the intention
of holding the investment
through its maturity spread isthe percentage difference in
(29:55):
current yields of various classes
of fixed income securitiesversus treasury bonds
or another benchmark bond measure.
Our set is a refinancing
and extension of A CLO investment period.
EBIT DA is earnings beforeinterest, taxes, depreciation,
and amortization.
An add back wouldattempt to adjust EBIT DA
for non-recurring items.
(30:17):
ETF are exchange traded funds.
Lior, the London Interbankoffer rate was replaced
by software on June 30th, 2024.
Deliver means reducing theamount of debt financing.
High yield bonds arecorporate borrowings rated
below investment gradethat are usually fixed rate
and unsecured default refers
(30:39):
to missing a contractualinterest or principle payment.
Debt has contractual interest principle
and interest payments,
whereas equity representsownership in a company.
Senior secured corporate loansare borrowings from a company
that are backed by collateral.
Junior debt ranks
behind senior secure debtin its payment priority.
(31:01):
Collateral pool refers tothe sum of collateral pledge
to a lender to support its repayment.
A on-call period refers
to the time in which adebt instrument cannot be
ally repaid.
A floating rate investment hasan interest rate that varies
with an underlying floating rate index.
General disclaimer section.
(31:23):
References to interestrate moves are based on
Bloomberg data.
Any mentions of specific companies are
for reference purposes only
and are not meant to describethe investment merit of
or potential or actualportfolio changes related
to securities of those companiesunless otherwise noted.
All discussions are based onUS markets and US monetary
(31:45):
and fiscal policies.
Market forecasts
and projections are basedon current market conditions
and are subject to change without notice,
projections should not beconsidered a guarantee.
The views and opinions expressed
by the Flat Rock global speakerare those of the speaker as
of the date of the broadcast
and do not necessarily represent the views
(32:06):
of the firm as a whole.
Any such views are subject
to change at any time basedupon market or other conditions
and Flat Rock Globaldisclaims any responsibility
to update such views.
This material is notintended to be relied upon
as a forecast, research,or investment advice.
It is not a recommendationoffer or solicitation to buy
(32:28):
or sell any securities or toadopt any investment strategy.
Neither Flat Rock Global
nor the Flat Rock GlobalSpeaker can be responsible
for any direct or incidentalloss incurred by applying any
of the information offered.
None of the information
provided should be regardedas a suggestion to engage in
or refrain from any investmentrelated course of action
(32:50):
as neither Flat Rock Global
nor its affiliates are undertaking.
To provide impartialinvestment advice, act
as an impartial advisor
or give advice in a fiduciary capacity.
Additional informationabout this podcast along
with an edited transcript may be obtained
by visiting flat rock global.com.
Popular Podcasts
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com