#19, Stephanie Setyadi, Partner, Ivy Hill Asset Management

In this episode of The CLO Investor Podcast, Stephanie Setyadi, a Partner at Ivy Hill Asset Management, provides two case studies for the types of businesses that can be found in CLOs. 

Episode Transcript

(00:06):
Hi, I'm Shiloh Bates, and welcometo the CLO Investor Podcast.
CLO stands for CollateralizedLoan Obligations,
which are securities backed by poolsof leveraged loans. In this podcast,
we discuss current newsin the CLO industry,
and I interview key market players. TodayI'm speaking with Stephanie Setyadi,

(00:27):
a partner at Ivy Hill Asset Management,
which is the middle market loanorigination arm of Ares Capital Corp.
She gave me two case studies for thetypes of businesses that can be found in
middle market CLOs. One companywas a software business,
and the other was an insurance brokerage.
And we talked about businesses thatdon't fit in the Ares credit box and are

(00:50):
screened out for one reason or another.We recorded this episode on March 13th,
before tariffs and recessionaryrisks had materially increased market
volatility. In the interestof full disclosure,
my firm invests in multipleIvy Hill managed CLOs.
If you're enjoying the podcast, pleaseremember to Share, Like, and Follow.

(01:11):
And now, my conversationwith Stephanie Setyadi.
Stephanie, thanks so muchfor coming on the podcast.
Thanks for having me,Shiloh. Happy to be here.
Why don't we start off by you telling usa little bit about your background and
how you ended up workingin private credit at Ares?

(01:32):
Sure.
So I began my career on thebuy side straight out of school in a credit training
program at a large mutual fund.I did that for a couple years,
and then I actually movedto the sell side after that,
and this was during the structuredfinance boom back in the mid-2000s.
So I actually spent a couple yearsas a CLO banker at Credit Suisse.
That obviously came to avery abrupt end in late 2008,

(01:54):
and the future of structured financeat the time was very much uncertain.
Luckily for me, Ares was one of the fewfirms actually hiring during the GFC,
as they were looking toacquire some middle market CLOs that were being divested
and bring them onto the privatecredit or the direct lending platform.
So in mid 2009, I joined the firmand I actually had this hybrid role.

(02:14):
I covered industries and portfoliocompanies and looked at new deals,
but I also helped onboard andmanage these middle market CLOs,
as those structures were new to the Aresdirect lending platform at the time.
It was a great fit for me. I was ableto get back into fundamental credit,
but also utilize the experience andknowledge that I gained at CLOs.
And so fast forward 15 plus yearslater, it's gone by in a flash really,

(02:36):
but I'm now a partner at the firm andI continue to be involved both on the
credit side as well asour strategic efforts,
such as our middle marketCLO issuance and management.
Were the CLOs that you acquired,were those from Allied?
So some of them are from Allied. Yes.
Some of them were from WellsFargo who was divesting them.
Wachovia at the time wasexiting the business.

(02:57):
So there's a lot of privatecredit managers out there.
Maybe tell us a little bit about yourplatform and how you guys see yourself as
differentiated.
We've been doing this a long time,so we absolutely have the experience,
but I think what reallysets us apart is our scale,
and particularly our originationand sourcing capabilities,
which allows us to be highly selective.We also focus on all market sizes.

(03:18):
Some direct lenders focus on oneend of the market or the other,
but we cover the spectrum. Wefocus on the core middle market.
We can play for sure in the uppermiddle market as well as the lower end,
and that allows us to find the bestrisk-adjusted return opportunities in all
market environments.
We also have a large incumbent portfolionumbering over 550 names today,
and that provides us opportunities foradditional capital deployment even when

(03:42):
the M&A market is slow, asit has been. And then lastly,
we have a robust portfolio managementapproach with a large team dedicated
purely to restructurings,
which I think is critical to be investingin this space. So all these things,
those are what sets us apart. Itall comes with time and tenure.
It's not easily replicable,
but that's I think what differentiatesus and what drives the track record that

(04:02):
we can be proud of.
And just definitionally, I mean,
how would you guys describe core middlemarket versus upper middle market?
I think people have differenttypes of definitions for that,
but core middle market, call itanywhere of 30 to 75 million of EBITDA,
maybe up to a hundred or so, uppermiddle market over 100 million,
and then lower middle marketat the lower end of that scale.

(04:24):
Got it.
So one of the things I wanted to coverwith you today is that often when I'm
educating people about CLOs,
I find the first place to start is justwhat are the underlying assets in the
CLO?
So there might be 100different private credit loans
that go in there,
and I was hoping we could just maybewalk through the case study or two,

(04:46):
and I understand it'llbe on a no-names basis,
but maybe just to give our listeners asense for the kinds of loans that are
going into your CLO vehicles.
Sure. At a high level,it's primarily first lien,
senior secure loans to private middlemarket companies and nearly all sponsor
backed. These are all true cashflow loans.
So they're EBITDA basedand as I mentioned,

(05:06):
it covers the entire EBITDA spectrumfrom call it a 10 million dollar EBITDA
company, all the way to hundredsof millions of dollars of EBITDA.
One thing too that is different for usin the middle market versus some other
players is that we runhighly diverse portfolios.
So you're going to see well overa hundred loans in each CLO.
Some other middle market portfoliosmight be more chunky than that.
Our average borrower sizes are around,call it half a percentage point.

(05:28):
That obviously benefits a diversificationin the event any one negative credit
event happens. And as far as a case study,
I can tell you about a loan thatwe've been in, an asset we've been in,
for years now. We firstgot back in it in 2019,
and this is a software company andsoftware is an industry that we like a lot
and have a lot of experience doinginvesting in and had a lot of success.

(05:50):
So a top-tier software sponsor wasacquiring this company back in 2019.
And what we liked about it was all thethings that you see in good software

companies (05:59):
a reliable revenue stream based on SaaS subscription model,
sticky customer relationships,very high switching costs,
and therefore highcustomer retention metrics,
a diverse blue chip customer base,and favorable industry tailwinds,
meaning there was a white space forthe company to continue to grow.
And typically what we do for these typesof opportunities is we obviously look

(06:20):
at what we like about it, and that'sbasically what I just described,
and that's our investment thesis,
and we're going to pursue thatopportunity in a two-stage process.
The first is we're going toscreen it with our committee,
assuming we like the business,
and talk about it with our investmentcommittee members and figure out what are
the risks in the business. Obviously,although we like software a lot,
there's some key risks and sometimesthere are more than others.

(06:43):
So we'll talk about those risks andfigure out what is our diligence path,
how are we going to mitigate thoserisks. For this particular company,
competition was a big one, althoughit did have a leading market position,
it still competed against larger providersof end-to-end software solutions as
well as smaller providersoffering point solutions,
as well as homegrown solutions thatcustomers were using such as Excel-based

(07:05):
software.
And what we did is we were able tofind out how the company differentiates
itself, and that could bedone through customer calls.
It can be done through market researchreports that a consultant would
commission.
It could be done through GLG orbasically industry calls to industry
experts.
And we found that the company itselfdifferentiated itself by offering high

(07:27):
quality software in a very niche marketwith very significant switching costs.
And that was demonstrated throughhistorical customer and retention rates.
And the industry itself was demonstratingstrong growth as customers were
transitioning away from homegrownsolutions to more sophisticated software.
And there was also opportunityto penetrate the existing customer base through
cross-selling. As far as someother risks that we identified,

(07:48):
even though we avoidhighly cyclical industries,
this particular company was sellingto some cyclical end markets,
such as chemicals and manufacturing.
But we found that this company was stilldiversified across various end markets.
So you would expect that notevery market would cycle at once,
and was even morediversified by end customer.
And more importantly than that is thatthis software was so critical to a

(08:11):
company's business that evenin a softer macro environment,
we did not see that customers would bewilling to switch out the software just
because they had to use it tocontinue to operate. And then finally,
because of the SaaS orsubscription-based model,
it's not tied to customerrevenue or customer volumes,
implying that any general macro weaknessshould not have a large impact in the

(08:31):
company's revenue base. So therewere some other risks as well,
but that's just giving you a flavorof some of the things that we look at,
some of the diligence that we do.
We typically have sell side materialsthat we're looking at because these are
typically still in the auction stage.
So we'll have weeks maybe or evenmonths to do our work, do our analysis,
and come up with ways that we're goingto get comfortable with some of these

(08:53):
risks.
And then assuming that everything checksout and we like what we've seen as far
as diligencing all of these risks,
we're going to bring it back toinvestment committee for final approval.
So that's what happened.
ARCC won the lead mandate for thattransaction and it's been in our portfolio
ever since.
So ARCC is your publicly traded BDC?
Correct. Yes.

(09:13):
So in 2019, was theinitial transaction then,
was it a leveraged buyout,was a company taken private?
Or was a company acquired from founders?
Or what was the initial reason foryou guys to lend money to the company?
It was a leveraged buyout.
It was actually the sponsorbuying it from another sponsor.
It was a small company at the time,so it was a change of control.

(09:36):
And do you have a sense for what theenterprise value of the business was in
2019, maybe as a multiple of EBITDA?
It was over 20 times, a pretty healthymultiple. So on an LTB basis, pretty low,
it was probably around 20-ish percent.
So that means the business wasvalued at 20 times cashflow.
And you guys were comfortablelending at four times, roughly?

(09:59):
Roughly, yes.
So for most businesses in the leveragedfinance space aren't valued at 20 times
EBITDA, right?
So that's a business presumably thatthe sponsor felt really good about its
growth prospects. Ithink on average, maybe,
do businesses trade out 10 times EBITDA?
Is that for a decent businessthat's growing at a moderate clip,

(10:19):
is that what you'd say? Or higher?
That's probably middle of the fairway.Could easily be higher than that.
Low double digits. Itdepends on the industry.
It depends on the growth prospects. Iwould say anything less than 10 times,
it's definitely a lowergrowth type of industry.
So we'd like to see industries thatprobably trade in the low teens to high
teens.
And then at a 20% loan to value,

(10:41):
where do you get paidfor taking that risk?
It definitely depends onthe size of the company,
the industry market environment.It was a small company at the time,
so we were able to get that premiumpricing despite the lower LTV.
And obviously the markethas changed a lot.
So these days a typicaluni-tranche type pricing would be,
call it 450 to 500 over SOFR.That's come in significantly.

(11:03):
Back when this was done in 2019,I don't recall the exact pricing,
but it was definitely northof that, given the size.
And so in 2025, this is stilla loan that's on your books?
Correct. We've been able to stayinvested in it as it's grown.
It's done five acquisitions since.
Still the same sponsor buthas added five targets,
and we've provided add-on financing,

(11:24):
so have grown with thecompany as it's scaled,
which is something thatwe're proud to do. I mean,
that's the benefit of havingthat incumbent portfolio.
We can get in early with a company whenit's small and stay invested with it and
be able to scale with it over time.
So for a borrower that has the abilityto borrow from the broadly syndicated or
traded market versus goingthe private credit route,

(11:44):
one of the advantages of going privatecredit is that it's just more flexible.
So there's only one lenderthat the borrower or the private equity firm needs to
work with. And so for anin acquisitive company,
like what you just described,
the private credit's probablythe better solution there,
even though it's going tobe more expensive than the broadly syndicated market.

(12:05):
Is that how we should think about it?
Yeah, absolutely.
There's a lot of benefits toaccessing the private credit market,
that certainty of execution at close,
the flexibility that can be providedby one or a handful of lenders,
not only at close, butdown the road. Amendments,
additional financingslike we just discussed.
And it's really a partnership-type ofmodel versus broadly syndicated world,

(12:28):
which you're dealing with ahundred plus lenders sometimes,
and it's just a differenttype of transaction.
Each market has its pluses and minuses,
and certainly in the upper middle market,
sponsors are going to look at both anddual track processes and figure out what
works for them. But the private creditworld definitely has its benefits.
One of the things that I make sure isclear in our investors' minds is that when

(12:48):
they see technology asan industry in CLOs,
and oftentimes it's, call it10 to 14% of total CLO AUM,
just to make sure it's totally clearthat this is not a couple of guys in a
garage with a business plan and a dream.
This is entrenched software witha business that has probably,

(13:09):
at a minimum, 15 millionof cashflow a year.
So maybe that's a hundredmillion of revenue.
So these are establishedleaders in their space.
They're not fly-by-night companies.
Absolutely. Yeah.
These are companies that have a productthat is mission critical to an end user,
an end company's business. So itcould be something like an ERP system,

(13:30):
for example.
It could be something that facilitatesbusiness to business transactions,
anything that really plays a criticalrole in a company's operations.
So will this ultimately leaveyour books when the company either
goes public and repays the term loanor the company is sold to another
private equity firm?What's the end game here?

(13:52):
So that could happen,
but something like this wherewe've been in it for some time,
we know it really well, it'sperformed very well in our portfolio.
What we'll typically try to do isstay involved in the next financing.
So if it does get sold to another privateequity sponsor, we're going to be,
hopefully, first in line to pitchthat financing to the next sponsor.
A lot of times we'll be the staplefinancing provider too. So in this case,

(14:14):
I think we're well positioned to do thatand be involved in the next round of
financing.
Great. And so then along the way,
could you just let us know whatyou guys do for valuations?
That would be every quarter,or how often you do it,
and what's the processthere, just so people know?
So yeah, we do have quarterly valuations.We're coming upon that now for Q1.

(14:35):
But basically we value every singleloan in the portfolio based on a few
different factors. So if it's publiclymarked, which a small subset is,
then we'll use the publicmarks. But more likely than not,
we'll be doing our own analysis.And that's, a lot of times,
for a name like this that's performing,it's going to be a yield analysis.
So we're going to benchmark the marketat the time and basically tranch out the

(14:57):
capital structure in terms of throughwhat leverage profile do we think this
should price for uni-tranche, fora first lien, second lien deal,
for a mezz ,for preferredequity, et cetera.
And basically figure out what the yieldshould be given the leverage profile of
the company and given the market yieldsat the time. Something like this,
where it's levered today and how it'sperformed, it'll be marked at par,

(15:19):
but other names that perhaps havelower spread or have had maybe some
performance softness, we'll discuss thoseand come up with a mark for each name.
Do you guys involve a third party inthat process or is it just your marks?
Yes,
we will have third party valuationproviders that will sign off on the marks.
Great. So that was"anonymous software company".

(15:40):
Do you have another company thatwe could maybe chat through?
Sure. So another industry that welike a lot is insurance brokerage.
And so this particular company, similarto the last one I just spoke about,
we've been in it for a number of yearsnow. Back then it was a small deal,
barely double digits of EBITDA, andwe came into a two-handed club deal.
And this company was your traditionalinsurance broker focusing primarily on

(16:03):
commercial and personal PNC insurance.
What we like about the space and thiscompany itself is that it has a very
recurring revenue modelthat's driven by commissions,
generated by policy renewals,
and that's demonstrated by stronghistorical retention rates as customers
typically don't change brokers, andconsistent organic revenue growth,
including downturns such as covid. Theindustry itself is recession resistant,

(16:25):
and in general,
it's a growing sector given the demandfor insurance products is only increasing
given the complexity of businesses today.
It's not to say the industryis not without its risks.
So for this particular companyand the industry in general,
it's a roll-up strategy.
There's a lot of mom and pops outthere that private equity companies are
rolling up to create larger,more sophisticated platforms.

(16:46):
And so execution and integration risk ofthat M&A strategy is critical to being
successful here. So notonly identifying them,
but integrating them smoothlyand quickly, that's key.
And we found that this company had astrong track record of doing that and was
also able to demonstrate that theseacquisitions continue to grow post-close,
driven by retaining the key employeesand driven by retaining those customers

(17:09):
after the fact. It's a competitivemarket. As I mentioned,
there are still a lot ofmom and pop shops out there,
so it's highly fragmented andthere's other scaled players as well.
But we found that local relationshipswith the end client is important in this
industry.
And because this company was able tobuild regional density in its key markets,
it was able to retain those customers,grow revenues, grow client retention,

(17:30):
and have strong organic growth, evenpast any of the acquisitions it has made.
And then back then, becauseit was such a small company,
one of the key risks was retainingproducers or the employees that sell these
policies to the end users. Being ableto mitigate that risk was key for us.
We were able to validate that the companyhas been able to retain its producers
historically,
and they were able to do thatbecause they were aligning interests.

(17:53):
And typically that's done byequity ownership in the company.
So that's just another example of a namein an industry that we really like and
that's done very well and has stayedin our portfolio for a long time.
So in insurance brokerage, these arejust agents that are placing policies,
they're not actually taking theunderlying insured risk there?
Correct. There is no underwritingrisk that these brokers are taking.

(18:16):
It's purely matching a company's needwith carriers and being able to basically
be an outsource salesforcefor those carriers.
So is the idea with a company like thatthat they'll grow through these tuck in
acquisitions until, again, there'sanother exit to another sponsor,
or through an IPO?
Yeah, these are typicallystructured with DDTLs,

(18:37):
so that's another benefit of privatecredit versus the BSL market.
So that's the delayed drawterm loan option they have.
Yep, exactly.
So they'll utilize that DDTL through thelife of the investment and be able to
add on these acquisitionspost-close. In this particular case,
that has happened,
but it's also changed hands to a coupleother sponsors during this timeframe,

(18:58):
and we've stayed investedthrough those as well.
And the EBITDA is now into the hundreds,
and we're still part of the lending group,
and hopefully we'll stay invested becauseit's been a very strong performer for
us.
So those were two companies that, as yousaid at the beginning of the podcast,
might represent half apercent of AUM in the CLO,
and I could definitely understand themerits of those and why they would work

(19:20):
for you guys,
but what are some risks that youguys focus on that just are maybe
non-starters? Companiesyou're going to screen out?
Highly cyclical industries. Weavoid anything such as oil and gas,
commodity-based sectors such aschemicals or metals, construction,
anything highly discretionarylike gaming or leisure.
Those are typically not areaswhere we're going to play.

(19:42):
And then anything that has significantconcentration and particularly customer
concentration, for us that's credit 101and especially the smaller a company is,
if you have any outsized concentration,that could be pretty meaningful.
It could mean game over for these typesof companies as something happens to
that customer.
And then also a key thing for us iswhat is the competitive differentiation

(20:04):
of a company? What is its secret sauce?What's the reason that it exists?
And what would happen if the companygoes away? Would people care?
So those are the key questions that weask ourselves. If we can't answer those,
we don't really know what differentiatesit. That's going to be a non-starter.
And if it has any significantconcentration, definitely by customer,
but also by product, if it's a very nicheproduct, one product type of company,

(20:27):
that's going to be probablya non-starter for us too.
And how do you view the private equityfirm that's acquiring the business?
How much weight do you put on that?
If it's somebody with a great PEtrack record over a decade plus,
or a newer private equity firm,
does it matter or is ita key item for you guys?
It matters for sure. It's definitelysomething that we will consider.

(20:50):
It's not to say that we won'tdo something with a newer firm,
but it's got to check all the other boxes,
and we have to have conviction aroundthat newer private equity firm.
Maybe they came from another shop before,
and so we know those professionals there,
but certainly a private equity shophaving the experience in a particular
industry. So for example, in software,
we know who all the top softwaresponsors are. In insurance,

(21:10):
there's some specialized private equityfirms that like that space and have
intimate knowledge of it. There'sothers that specialize in carve outs,
for example. So for a carveout type of transaction,
and we're going to want to see that,
it's certainly a factor that we'lllook for because that's our ownership.
We want to make sure that they know whatthey're doing and we have the expertise
coming in.
Are there any large private equity firmsthat do a lot of LBOs that you won't

(21:34):
work with? You don't haveto give me any names.
I don't think our blacklist is that long.
I think for certain firms thatmaybe have some reputational issues,
we'll take that intoconsideration for sure.
But I wouldn't say that our"do-not-work-with" list is lengthy.
We work with basically many,many sponsors. We cover,
I think over 500 sponsors these days.So a wide variety, which is good for us.

(21:55):
So we don't have to rely on any onesponsor or set of sponsors. But yeah,
if they're known for being aggressivewith lenders or having very loose
documentation, that's certainly somethingthat will factor into our decision.
Okay, appreciate that. Just then,maybe transitioning to market trends.
So across private creditand broadly syndicated,
we've seen more favorable borrowing costs.

(22:17):
That's certainly beenthe trend really, since,
well dramatically I guessover the last year or so.
How is that affecting your business?
And I guess it representslower returns for investors,
but maybe just describe thetrend to lower borrowing costs,
lower spreads, and how that'saffecting your business.

(22:37):
You're right. Spreads havedefinitely compressed.
It's driven by the competitivemarket environment today,
but also due to generally better creditperformance than I think many of us
would've expected. At this point. Wethink spreads have largely bottomed out,
but as you mentioned,
base rates are still higher and webelieve that they will stay higher for
longer. So at the level we're at,
we're still earning an attractive yieldgiven that we're 100% floating rate.

(22:58):
At the same time for our CLOs,
the fact that spreads have come in meansthat reliability costs have come down
as well. And so that'sbeen a benefit for us,
that equity arbitrage still definitelymakes sense for us given where we are.
So after these loans are originated,
and if spreads have tightenedin the market, I mean,
how long is it before the CFO ofthe underlying company can come back

(23:20):
to you and ask for a lower spread?
Usually it's a six month non-call,sometimes it could be 12 months.
We've seen borrowers repricingfor sure, sometimes twice.
We think that's largelyover for the most part,
especially the market recently hassold off a bit and softened a bit.
A lot of loans are nolonger trading above par,
so hopefully that repricingwave is behind us.

(23:41):
From the perspective of CLOequity, yeah, we see it on both.
So on the one hand, the loan spreads,
the assets are paying us lessin terms of yield. However,
we've been able to refinance and extendthe lives of many of our CLOs with
good borrowing costs. So we care aboutthe net difference between the two.
But then if you're a CLO debtinvestor, on the one hand,

(24:03):
you probably think the economicoutlook's pretty favorable,
at least that was the expectationI guess, before a couple weeks ago.
So spreads are coming in,
but you probably feel pretty good aboutyour prospects for getting repaid.
Has talk of tariffs orproposed or Tweeted tariffs,
has that affected your business there?

(24:24):
It's hard to keep up with tariffsas it's changing every day it seems,
but it's certainly somethingwe're staying on top of.
We have a 50 plus personportfolio management team.
We have individual deal teams that arein constant contact with management teams
and sponsors.
So we've already done apretty comprehensive analysis of the portfolio and we're
continuing to refine that asthings change. For the most part,
it looks like we havevery limited exposure,

(24:46):
and a lot of that is due to the industrieswe like in that we overweight such as
software and insurance brokerages andservices-based types of industries.
But like I said, it's somethingwe'll continue to monitor.
We're doing our homework,
we're staying on top of government costcutting or AI impacts, things like that.
Everything is creatinga lot of uncertainty,
but the way we run our businessis that we have that PM team.
We have our deal teams thatare in constant dialogue,

(25:08):
so we'll just continue torefine our analysis as we go.
And then one trend also in the market Ithink is borrowers continuing to ask for
deals without financial covenants.
As a lot of money has beenraised in private credit,
do you feel like the docs that you'regetting are still pretty good and you're
getting financial covenantswhen you need them,
especially when the companiesare a little smaller?

(25:30):
How should we think about that dynamic?
The smaller companies absolutelywill have financial covenants.
The upper middle market, you'reseeing that less and less. But for us,
where we play, like I said, wecan pivot across the spectrum.
So if we think it's gettingtoo competitive in the upper middle market in terms
of pricing, in terms of documentation,
we can go back down to the core middlemarket or the lower middle market and

(25:51):
find that we're getting betterrisk-adjusted opportunities there,
given pricing or leverageor documentation. So we're very focused on docs,
obviously, given what we'veseen in the BSL market,
we're focused on getting all thenamed collateral protections.
So even for a company that maynot have a financial covenant,
oftentimes those other negativecovenants are more important.
And so we actually have a page in everysingle investment committee memo now

(26:14):
that goes through red, yellow, green,through every single type of term,
and what we're looking for and what thedocument has and how we can improve upon
it.
How many private credit CLOs doesAres usually issue in a year?
So Ares direct lending last year startedissuing CLOs for the first time in
addition to Ivy Hill, which hadbeen doing it since its inception.

(26:35):
So going forward, we expect,
call it two to three per quarter ofboth new issue and refis or resets.
So Ivy Hill is focused on resets thatwe've had a bunch of older vintage CLOs
coming out of its on-callperiod or ending reinvestment.
So we're looking to reset those attoday's more favorable cost of capital.
And then the direct lending side,this is a newer avenue for financing,

(26:56):
but they're actively doing that as welland looking to do more new issue this
year.
Does the pickup in CLOissuance on your platform,
does that reflect just how bigyou guys are? And at some point,
if you want to lever adiversified portfolio of loans,
you can either go to banks, as you know,
or borrow through the securitizationmarket, so that's a CLO.

(27:16):
Does more CLO issuance just meanyou see better financing terms from
CLOs or maybe you've outgrown afew of your banking relationships?
I think we'll continue tohave both, to be honest.
We have some very strongbanking relationships and some facilities out there
that we've had for a numberof years that we'll continue.
I think it's just more having bothsources of financing as options.

(27:38):
You never know when one market is goingto be more favorable than another.
And so as the middle market CLO industryhas grown in terms of investor base,
in terms of interest in it,and depth of the investor,
and as economics have becomemore compelling there as well,
we're going to continue to access that,
but keep those bankingrelationships open as well.
And then just one last question.So you mentioned Ivy Hill.

(27:59):
Could you just explain the relationshipthere between Ares and Ivy Hill
and what the difference is?
So Ivy Hill is aportfolio company of ARCC.
It was founded in 2007 as asenior loan asset manager.
The strategy back then was to be theprimary source of first lien senior
secured loan investments,

(28:20):
because back then the ARCC coreproducts were really more second lien,
preferred equity, juniorcapital, et cetera.
So Ivy Hill was a primarypocket of capital for first lie,n middle market loans.
Great. Well, Stephanie,
is there anything else topical inprivate credit that we could discuss?
I think we hit on the most topical stuff,
which is tariffs and someof the never-ending policy changes that seem to be

(28:43):
dominating the headlines, butthere's been more talk of volatility,
uncertainty, potentialrecession, et cetera. But for us,
I think we've been doing this a long time.
We've done it through multiple cycles,
and we've been consistent with ourapproach, which has served us well.
So I think if we juststick to our knitting,
keep doing what we're doing and ourscale, our resources, our diversification,

(29:04):
I think we're well positioned to withstandwhatever changes or headwinds may
come our way.
Well, Stephanie, thanks somuch for coming on the podcast.
Really enjoyed our conversation.
Thanks for having me, Shiloh.
The content here is for informationalpurposes only and should not be taken as
legal, business, tax,or investment advice,

(29:26):
or be used to evaluate anyinvestment or security.
This podcast is not directed at anyinvestment or potential investors in any
Flat Rock Global fund.
Definition Section Securedovernight financing rate, SOFR,
is a broad measure of the costof borrowing cash overnight,
collateralized by treasury securities.The global financial crisis,

(29:51):
GFC, was a period of extreme stress inthe global financial markets and banking
systems between mid 2007 and early 2009.
Credit ratings are opinions aboutcredit risk for long-term issues or
instruments.
The ratings lie on a spectrum rangingfrom the highest credit quality on one end

(30:11):
to default or junk on the other. AAAA is the highest credit quality.
A C or a D,
depending on the agency issuing therating is the lowest or junk quality.
Leveraged loans are corporate loans tocompanies that are not rated investment
grade broadly. These syndicatedloans are underwritten by banks,

(30:32):
rated by nationally recognizedstatistical ratings organizations,
and often traded amongmarket participants.
Middle market loans are usuallyunderwritten by several lenders with the
intention of holding theinstrument through its maturity.
Spread is the percentage difference incurrent yields of various classes of
fixed income securitiesversus treasury bonds,

(30:55):
or another benchmark bond measure.
A reset is a refinancing andextension of a CLO investment.
EBITDA is earnings beforeinterest, taxes, depreciation,
and amortization.
An add back would attempt to adjustEBITDA for non-recurring items.

(31:15):
The London Interbank offerrate was replaced by SOFR on
June 30th, 2024.
Delever means reducing theamount of debt financing.
High yield bonds are corporate borrowingsrated below investment grade that are
usually fixed rate and unsecured.
Default refers to missing a contractualinterest or principal payment.

(31:39):
Debt has contractual interestprinciple and interest payments,
whereas equity representsownership in a company.
Senior secured corporateloans are borrowings from a company that are backed by
collateral.
Junior debt ranks behind seniorsecured debt and its payment priority.
Collateral pool refers to the sumof collateral pledge to a lender

(32:02):
to support its repayment.
A non-call refers the time in which adebt instrument cannot be optionally
repaid.
A floating rate investment has an interestrate that varies with the underlying
floating rate index.
RMBS are residentialmortgage backed securities
The UK LDI,

(32:22):
that's liability driven investmentcrisis triggered by the mini
budget in September, 2022,
saw leveraged pensionfunds with LDI strategies
struggle to meet margin calls amidrising interest rates leading to the sale
of gilts, enforcing the Bankof England to intervene.

(32:44):
NAV loans are loans backed byseveral private equity investments.
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and are not meant to describe theinvestment merit of or potential or actual

(33:05):
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Market forecasts and projections arebased on current market conditions
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Projections should not beconsidered a guarantee.

(33:26):
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(33:47):
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(34:11):
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(34:35):
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