#4 Ivo Turkedjiev, Broadly Syndicated CLO Manager, New Mountain Capital

In the fourth episode of The CLO Investor, Flat Rock Global CIO Shiloh Bates discusses credit investing, loan recoveries, and the path to building a successful management platform with Ivo Turkedjiev, a broadly syndicated CLO manager at New Mountain Capital.

Episode Transcript

(00:03):
- Hi, I'm Shiloh Bates
and welcome to the CLO Investor Podcast.
CLO stands for collateralizedLoan obligations,
which are securities backedby pools of leverage loans.
In this podcast, we discusscurrent news in the CLO industry
and I interview key market players.
Today I'll be joined by Evo Turk Jiv,

(00:25):
a broadly syndicated CLOmanager at New Mountain Capital.
The CLO manager is the entitythat picks the initial loans
for the CLO
and keeps it fully investedduring its reinvestment period.
The CLO manager also worksto ensure the CLO passes all
of its many tests.
New Mountain managesapproximately 40 billion of a UM,

(00:48):
of which 10 billion is in credit products,
both middle market andbroadly syndicated loans.
I asked Evo to join me today
because of the strong performanceof the CLOs He manages.
Some of the topics fortoday's podcast include New
Mountain's approach to creditinvesting, loan recoveries,
and the path to building a successful CLO

(01:09):
management platform.
Now let's get started. Evo,welcome to the podcast.
- Thank you so much for having me, Shiloh.
- Great. Well you andI have known each other
for quite some time now,
- But- Why don't you take a little bit of time
and tell our listeners a littlebit about your background.
- Sure. I got involved inthe leverage loan space.

(01:32):
It was my first job out of college.
Started in 2001 at LehmanButters in the leveraged finance
group, underwriting leveragedloans and hired bonds.
Timing was somewhat challenging two months
after I was on the job.
Nine 11 happened, we didn'teven have an office, worked out
of a hotel for several months
until Lehman bought abuilding from Morgan Stanley

(01:55):
and moved to the current bareast building in Midtown.
So yeah, it was very interesting
because in those days, obviously 2000,
it was the telecom bust,the tech bust were kind
of happening, the NASDAQwas trading down massively
and the nine 11 happened
and there was this expectations almost
that all markets are shut

(02:16):
and are we even goingto be working? And yeah,
- I remember- Lo and behold, two months
after nine 11, I worked on a bond deal out
of a hotel room in Midtown
and the market openedrates were coming down
and what was a pretty smallinstitutional leverage loan
market at the time, itwas about 150 billion.
It was really an emergingmarket really started growing

(02:39):
as lower rates
and more activity fromprivate equity sponsors
really boosted the market.
But the other thing that wasreally boosting the market,
and I didn't know much atthe time, was the emergence
of a CLO product, whichwas really expanding.
The technology was proven at that point
and when more managerswere getting involved
and expanding what wasa pretty tiny market.

(03:00):
- And so how did youend up at New Mountain?
- So after Lehman, I actually moved
to the buy side in 2003, workedfor a shop called GSC Group
and I was hired
because we were doing ourfirst a regular way CLO at
that time at GSC group
and we're looking to grow the business.
And I started as an analyst

(03:21):
and then pretty quicklygot involved in trading
and portfolio management
and just in time in 2008
for the financial crisis to happen.
And have to say at
that point I reallylearned a lot about CLOs,
how CLOs work on thespot, kind of, you know,
thrown in the line of fire.
2008, once Liman filed,

(03:42):
leveraged loan prices declinedin a very substantial way.
Every other loan was tripleC almost. That's how it felt.
So the CLOs got really stressed
and it's interesting,you know, adults times,
very few people, I mean there was a lot
of some doubt in the marketwhether CLOs can survive
the stress of a Lehman
because that's not whatwas modeled at the time.

(04:03):
And pre lemen CLOs actuallywere more leveraged
than they are today.
There was more risk in the structure,
the equity cushions were thinner
and there was more leveragethrough every tran,
all the way down to thebottom of the stack.
Yet the deals did very well.
I think to the surpriseof a lot of people,
the self-healing mechanism, the ability

(04:24):
to buy cheap collateral.
What ended up happening is a lot
of the two thousand sixtythousand seven vintage deals ended
up being great deals, whichnobody could believe me.
'cause at the time Iremember everyone thought
that these transactionswould fail and they didn't.
And I think post LeemanC market really took off.
So actually prior to joining New Mountain,

(04:45):
I spent almost a decade atInvesco where had various roles.
But one thing that I led theCO liability investment book,
we managed over a billion
of CO liabilityinvestments across a couple
of different strategies.
So that showed me a differentaspect of the CO world,
not just as a manager,but also as an investor.

(05:05):
So that was a very interesting experience.
And then in 2019, I joinedNew Mountain to start the seal
of business here at New Mountain.
- And so what attractedyou to New Mountain?
- New Mountain at the timewhen I joined the company had
been around for almost 20 years.
I actually got involved inthe credit business right
after Lehman as well,seeing an opportunity

(05:28):
to buy loans of companies.
That New Mountain, whichthe core private equity firm
started as a private equity firm, a lot
of accumulated sector knowledgeand company knowledge.
So when the ability tobuy loans of companies
that were fully underwrittenat 60 cents on the dollar
appeared, that was viewed asa very attractive opportunity.

(05:48):
That portfolio allocation froma private equity fund at the
time later on went to becomeour publicly traded BDC,
new Mountain Finance Corporation, NMFC.
That's how the credit business started.
And at the time whenI joined New Mountain,
had a really good track record
of really protecting the downsides,
the defensive growth mentality

(06:09):
that we employ across allour strategies had really
translated to a very low defaults rates
and net gains in some of thebroadly syndicated portfolios.
So I thought
that the firm had a reallydifferentiated strategy
and ability to analyze credit
and there are over a hundredCLM managers out there,

(06:29):
but not all of them havedifferentiated strategies.
And I thought that I had an opportunity
to create a CLO managerwith the firm's backing
that was differentiated
and could provide analternative to investors.
- I think one of the things that appealed
to me about your platform
besides the track record, isjust that, my understanding is
that a lot of the loans,

(06:50):
their LBOs were your private equity folks.
They're probably not thebuyer of the company,
but maybe they participatedin the auction,
they did due diligenceon the company there.
And so you have real deep expertise
by the time the loan gets to you.
The company's already been circulating
as an idea around New Mountain,

(07:11):
- Certainly for art of the investments.
That is true. But I think
what we've done here at New Mountain,
we've been tracking sectors.
Again, we invest in defensive growth
and the way we define defensivegrowth is we're looking
for companies
and sectors that have really good medium
to long-term growth trajectories,
good tailwinds in their back
and within those sectors weseek to identify companies

(07:33):
that are a cyclical thatcan provide, that can grow
and do well no matter
what the general economiccycle to get there.
We spend a lot of timestudying industries,
developing relationshipswithin industries, getting
to know companies, getting toknow players, bringing a lot
of executive talent fromthose industries as part
of the New Mountain Network,in addition to companies

(07:55):
that we've evaluated thelake directly at some
point in the past.
We also have the ability toreach out to this broad network
that we have developed andreally help our credit team
verify the thesis, make surethat we're not missing stuff.
You can talk to people
that are operating in theindustries we're investing in day
to day, and
that can help us reallyidentify potential pitfalls

(08:18):
and risks that just sittingat the desk here in Manhattan,
our analysts might notbe able to identify.
So I think that's really the
differentiation that we're bringing.
Again, combined with sector thesis,
avoiding deeply cyclicalsectors where our view is that
companies don't ultimatelycontrol their own destiny.

(08:39):
- So in a broadly syndicatedloan, if Bank of America
or JP Morgan is the underwriter,
let's say it's a billion dollar loan,
and they have to decide whothey're gonna allocate that
to today, a lot of timesthe loan's oversubscribed,
so there's more demandfor the loan than supply.
Could you talk a little bit about
how you think you guys aretreated in that process

(09:00):
by the banks and if you kind of punch
above your weight in terms ofthe allocations that you get?
- Great question. In a market like today,
pretty much every newissue, loan transaction,
this oversubscribed,there's a lot of demand
for loans right now on themarket's been really ripping
higher for the last six months
and new issue loans tend to be attractive.

(09:21):
They come at a slightall ID slight discount
to par in a market where largeportion of the loans trade
above par, that's pretty attractive.
So as a result of that,there's a lot of demand,
as you mentioned, fornew issue allocations.
I think the way we differentiate ourselves
and punch above our weight, as you put it,
we do have really goodrelationships with sponsors.

(09:44):
We do have a direct lendingprivate credit business
where we cover sponsors develop
relationship with these sponsors. So
- Note in ccie LO jargon,a financial sponsor refers
to a private equity firm
- That it certainly ishelpful when looking
for favorable allocations.
But in addition, as a sponsor ourselves,

(10:04):
we're active in the marketfinancing our portfolio company.
So that leads to somepretty good relationships.
Our capital markets desk hasreally good relationships
with the banks, with theunderwriting banks as well,
and we're often making callsto these desks on our behalf
to get a better allocation.
But yes, it's a market inwhich everyone is looking

(10:26):
for their little advantage
and we believe we havea couple in our pocket.
- So you're in the process
of building out the CLO platform there.
Could you talk a littlebit about just some
of the challenges to gettinga CLO platform up and running
and how you guys have tackled those?
- So in 2019 when I joined, we had

(10:48):
to build the business from the ground up.
What was helpful is wealready had a credit business,
as I mentioned earlier.
So we had back office, middleoffice functions in place,
compliance functions Ibenefited from, a lot of
the groundwork was there,
but we had to set up OSCEbusiness from scratch.
What we chose to do is we chose

(11:08):
to outsource certain functions,especially middle office,
back office functions.
We had to hire a team,grow the team to make sure
that we have the expertise tocover all the 200 plus loans
that are typically go into ACLO origination and trading.
Other areas where we had toexpand, we hired a couple

(11:28):
of folks that used to be CLObankers joined me to help kind
of with structuring deals
and monitoring existing transactions.
So it's a lot of work.
Those first 18 months feltlike the workday never ended,
but you know, pretty happywith the way things turned out.
And of course my timing thistime also was not great.
We were six months intoit when covid happened, so

(11:51):
that threw a little bit of a range.
But again, the CLO marketrebounded pretty quickly
and in October of 2020, weissued our first transactions.
We were the first new managerto come to market after Covid
and after Covid, the marketcame back as robust as ever.
So the good thing about CLOsis it's a market that again,

(12:11):
has withstood the testof multiple events and
- Have a lot of challenges,
- A lot of challengesand keeps coming back.
- So at some point Iimagine you're gonna want
to be on all the approvedlists in Asia where a lot
of times you get the bestdebt execution there.
And from my perspectiveas a CLO equity investor,

(12:32):
good returns are generatedboth by returns on the assets
that you're managing, but alsogetting good debt execution.
So what's the processlike in kind of educating
these investors about themerits of your platform?
- Sure, I agree a hundred percent with you
that getting good debtexecution is crucial
to getting good equity returnsand building the platform.

(12:53):
As a newer manager, itwas very important for us
to get our story out
and that requires a lotof investor outreach.
Last month I've been to both Asia
and to Europe speaking with investors,
selling the new mountainstory, showing our performance
and our differentiation andsharing views on the market.
That's a repetitive process.
Again, once you get on investors screens,

(13:15):
they wanna follow yourperformance for some time.
But I think again, withmore differentiated story
and good performance,
good performance has certainlybeen very helpful in getting
on more and more investors approved lists,
which again is crucial
to tightening the spreadon the liabilities
and creating better equityarb for our investors.
- What do you think the biggestmetrics the Asian investors

(13:39):
are looking for on the debt?
It seems to me that the approved lists,
there are a big function ofjust name recognition, so
that's certainly helpful,but are they focused on
the equity residual value at deals?
Are they focused on howmany defaulted loans
or triple C rated loans?
I mean there's tons of metrics, right?

(14:00):
So are there any that theyare particularly focused on?
- I think some of themetrics that probably
Japanese investors carea little bit more about,
they care about the size of the platform.
You often hear that three
or 5 billion number of a UMis a minimum for an investment
for a lot of the larger banks over there.

(14:20):
In addition, track recordlinked of the track record three
to five years track recordis also very important.
In addition to all the othermetrics that you mentioned
that I think most investors payclose attention to diversity
of the portfolios, theaverage rating as well
as Triple CS downgrades.
These are all metrics thatinvestors often ask about.

(14:40):
They want to understandthe strategy of the manager
and as well as Triple CS downgrades.
These are all metrics thatinvestors often ask about.
They want to understand thestrategy of the manager and
- Note the range of CLOmanagement strategies include
how much diversity thereis in the loan pool,
if the spread on the CLOloans is low or high,

(15:01):
and whether the CLO managerpurchases second lien loans
or bonds subject to theconstraints of the indenture,
- They do wanna make sure that
you're following the strategy.
I think as an investor, when Iwas investing, the last thing
that I wanted to see was a manager
who changed strategies often
that made the investment less predictable

(15:22):
and it wasn't easy to evaluate
because you know, if you're investing,
if a manager fits one strategywithin a broader portfolio
and then shift to a differentstrategy, that's something
that as an investor I did not appreciate.
So I think that's something
that investors are focused on as well.
- I've never bought aaa,
but I imagine that fromthat perspective, none

(15:42):
of ever defaulted.
So that's great. But you do have things
that you care aboutwould be, is there a risk
that I get downgradedto aa maybe that matters
for capital charges around the bank.
And then there's also just kindof the platform risk where,
I don't know, a couple senior guys leave
and there's a transition
and a for aa, I mean it'dbe worse for the equity,

(16:04):
but at the AAA they wanna seesome stability, a big platform
with a deep bench
where whoever boughtthe AA isn't gonna have
to explain anything kind
of up the chain at the bankthey're investing from.
I guess that's thepriority for those guys.
- Yeah, no, I certainly agree with that.
- So I think CLO equity has hada very good last year, 2023,

(16:26):
and then this year the trend's continuing.
So we feel good about that.
I think there's a lot of upsidecoming this year in terms
of refis and resets,
but the one headwindreally I think has been
loan recoveries.
And so your deals haveperformed very well.
But across the market therehave been some recoveries
where I guess the firstline lenders found out

(16:47):
that they weren't as senior
and secured as they expectedto be at the end of the day.
So could you talk a littlebit about recovery rates,
where you see that going
and what you do to makesure that you're in deals
where the legal documentationis up to par, if you will?
- Sure. It's a great question.
Obviously I think this issomething that we spend a lot

(17:09):
of time talking about internally,
and it's been a big topic in the market.
I think several factors arereally driving the decline in
recovery rates that we have seen in the
last couple of years.
I think from my perspective,the first defaults
that we saw in 2223,once we saw rates go up
and companies struggling

(17:30):
to make their interest payments combined
with the inflationary challengesthat we had in the economy,
supply chain disruptions, et cetera.
The first companies thatreally defaulted were companies
that in some cases shouldhave defaulted a long time ago
that had kicked the can down the road.
And vision is probably thename that comes to mind
as a poster child for that.

(17:52):
Companies that had restructuredmultiple times in attempts
to create more runway
for the company when thereality was the debt burden was
never sustainable
and the headwinds, the secular challenges
that they were facing made it impossible
to grow out of the capital structure.
So the recoveries in thosesituations ended up looking worse
than they should have been

(18:13):
because again, we hada situation where more
and more debt keptcoming into the business
to provide a runway
and ultimately impactinglayering existing layers
and impacting recoveries.
- Note, the layering of debt refers
to the company taking on additional debt
with a higher seniority thanthe existing debt layering is
not permitted in most firstlien loan credit agreements.

(18:36):
- The second driver forme was you saw a lot
of the secularly challenged businesses.
Also the fault movie theaters is probably
another poster channel for that.
The business that withtechnological innovation became
apparent that the long-term outlooks for
that business are not good
and the valuation kept coming down

(18:56):
and as a result, therecoveries did not look good.
The third factor and the onethat we're spending a lot
of time on is the newliability management exercises
that have really started
to define restructuringsin the loan market.
Perhaps for listenerswho are less familiar
with the markets, withloans, the loan documents,
you have a first lien packagein on almost all assets.

(19:18):
Typically, however,
in good markets like we hadin 2021 where we had a lot
of money chasing deals,the covenants deteriorated
and sponsors got a lotof leeway to layer debt
to do things without lender approval.
Those openings created theability for investors to come in,

(19:39):
take advantage of theseloopholes, layer the existing debt
and impact negatively recoveries.
It's an unfortunatedevelopment in the market, one
that we've been vocal against,
but that certainly hasimpacted recoveries.
And that leads me to kindof, to answer your question,
your initial question, howdo you protect from the ace,
the good deals, the dealsthat everybody wants?

(20:01):
Kind of as you mentioned earlier,the oversubscribed deals,
they'll understand they have not a lot
of leverage pushing back oncovenants and the loan docs.
So that's necessitate reallystrong views on credit.
Kind of going back to theway we believe we protect our
investors is really bydoing a lot of work upfront
and making sure thatwe invest in businesses

(20:22):
that have low probability ofhaving to use these buckets,
having to use these liabilitymanagement exercises
that ultimately could impact recoveries.
So I do think that overthe next couple of years,
the defaults that are going tocome will have better outcome
because I do think that thosedefaults will really be driven
by good businesses thathave bad capital structures

(20:43):
that got a little overleveredwhen rates were zero
that could not stay prolonged,5% interest rates SU FR
levels and as a result need
to restructure in the balancesheets to rightsize the debt.
So I do think the recoveriesthere will be better,
but the one wild card is again,
the direction in which theseliability management exercises

(21:04):
will take and that providesa little bit of uncertainty.
- I think most CLO equityinvestors assume there'll be a
70 cent recovery at the end of the day.
Should we think of thatas a number from the past
or is that still attainable ifyou're with the right manager
and in the right deals?
- I do think it's a numberthat's still obtainable,

(21:24):
but I think as a market,I do expect recoveries
to come a little bit lowerthan the historical average.
I remember 10 years ago wewere using 80, that kind
of went down to 70.
So we'll see if time willtell what the right numbers.
But with the emergence ofmore loan only structures
and some of the leeway in the documents

(21:45):
and these liability management exercises,
which reduce recovery iskind of upfront, I do think
that it's reasonable to assume
that the numbers should bea little bit lower than 70.
- One of the things we'veseen in just how default rates
and recovery rates arereported is that usually
what makes it into the journal
or to Bloomberg is the defaults

(22:08):
and recoveries of the overall loan index.
And that could be an interesting number,
but what we kind of careabout is the default
and recovery rate in CLOs,
which have a more conservativeslice of that index.
And then beyond that, hopefullyyour CLO investor is able
to add value and be with managers
where it's even a more favorablecut of the loan universe.

(22:31):
So some of the loan recoveries
that were low justweren't in CLOs anyways,
so it was like a interesting headline,
but more of an issue for likemaybe a distress semester
or A BDC.
So that's what we saw there.
- I can say managers havegotten very sophisticated
and generally manage downgrade risk

(22:51):
and manage the faultrisk before it happens.
So what we do is when wesee deterioration in quality
and performance, we look tousually pare down the positions,
seeing that we might'vegotten the initial underwrite
slightly wrong or the companyjust underperformed something
in the market changed.
And I do think that witha lot of the restrictions

(23:11):
that CLO dens put on managers,
most managers are very focusedon protecting the downside
and tail risk within their portfolios.
- So then there's significantupside of my opinion
for the equity coming thisyear from refis and resets.
So we basically have mapped out all
of our deals when aon-call period comes off,

(23:32):
if there's something to do,it could be a refinancing,
it could be a reset, could be nothing,
could be we've already gota good capital structure
and we're just gonna take it forward.
So how do you guys thinkabout the optionality
and maybe some modelingyou do to kind of determine
what you think the bestpath is for your CLOs?
After the on-call expires,

(23:52):
- Once the deal is outof the on-call period,
we're regularly evaluatingwhat are the options,
where is the capitalstructure and the money,
or do we have a chance toreset the capital structure,
lower the cost of liabilities,extend the deal, et cetera.
So that's part of just aregular monitoring process
and it's always the questions once the

(24:15):
perfect time to do it.
You know, if you wait forthe absolute perfect moment,
you risk the, the market moves away.
So that's something that factorsinto that decision as well.
Yeah, sure, the market couldtighten another 10 bips from
the liabilities, but Ialso might miss my window
of opportunity here.
So it really is on the case by case basis.
We look at where the dealis from a par perspective,

(24:37):
the portfolios, howreset all the portfolios,
are there any assets thathave to be excluded, talk
to our equity investors
and get their thoughts on
what the optimal timing is as well.
But it's an ongoing process for sure,
and what you're seeingright now is I think a lot
of the deals that are comingfor recess were the deals
that were done in 22
and 23 that have highercost of liabilities

(25:00):
where the reset is what I woulddescribe as a no no brainer.
You're able to lower the costof liabilities in many cases
by 40 50 bips, creating a muchbetter outcome for the equity
or older deals that were done pre covid
that are towards the reinvestment period.
But if you have a cleanportfolio, you have the ability
to do something creative with the deal
and reset it and extend it.

(25:21):
Or in some cases justrefinance the liabilities,
lower the cost of capital
and keep the arbitrage going longer.
- One of the things we'veseen for the 2021 vintage
where we got really gooddebt execution, I think kind
of a misconception in the market is
that when the reinvestment period ends,
the CLOs done reinvesting,
and that's really prettyfar from the case.

(25:42):
It's actually true in middlemarket CLOs, it's different,
but in broadly syndicated,there's so much flexibility
to reinvest after thereinvestment period ends.
So that typical indenture saysthe reinvestment period's up,
but if any loan optionally prepays,
you can reinvest it subjectto some constraints there.
But the point is

(26:03):
that every loan repaymentalmost is unscheduled.
So we've seen a lot of deals continuing
to invest two years post thereinvestment period ending.
So I think that kind of tiesa little bit into the refined
reset conversation in that just
because the reinvestment period is ending,
if you have a good AAA

(26:24):
or cost down the stack, you might be able
to keep the CLO pretty full for B
or plus, depends on prepaymentrates and other things.
If you have that good debtexecution, there's no rush
to move into something else.
- Great. So I think theflexibility is there,
and again,
certain managers are moreaggressive than others on
reinvesting proceeds,

(26:45):
but it definitely needs tostudy the doc as an investor,
especially if you'reinvesting up the stack.
If you're a AA investor, thatbecomes a very important part
of the conversation.
- Yeah, if you're AAA from 2021,
you just want your moneyback as soon as possible
and you could reinvestit wider spreads today.
So wanted to also ask, what's one

(27:08):
or two things that youfind interesting about the
CLO LO business?
I mean, you kind ofmentioned self-healing,
which would be at the top ofmy list, but what's like one
or two other things that areunique and fun about CLOs?
- I think the clo o markets as a manager,
as an investor I guess as well,
you're always chasingthe perfect arbitrage
and there's always, again, alot of things have to align for

(27:31):
that to happen,
and it's a very dynamicative process of trying
to pick the best timing.
So that's something that I enjoy.
What is the perfect timing tocome to the market with a deal
and that process,
creating the transactionlighting everything up,
I find pretty exhilarating.
The other thing that I findvery fascinating about the asset

(27:52):
class is that I think that's something
that you had mentionedbefore on your podcast is
that the 2007 transactions
that everyone thought wouldbe real duds ended up being
great deals
and that I think everymarket offers an opportunity
even it would maybeconsider to be a bad market.
You have the ability tobuy loans very cheap,

(28:12):
create real principleappreciation within the portfolio,
which could really drivereturns in a really good market.
You have the ability tolock in cheap liabilities,
which create a lot ofoptionality to take advantage
of market dislocations overthe reinvestment period.
So again, a dynamic product
that's every deal is kind of unique.

(28:33):
Every deal has its own dynamics
and every market offers an opportunity.
- I started buying CLOequity about 12 years ago,
and the arbitrage has always been kind
of like a funny concept for me.
So like if you studyfinance in grad school,
you learn arbitrage is riskless profits.
You buy a stock in onemarket and sell it in another

(28:54):
and you make money
and CLOs arbitrage is not riskless at all.
That's definitely not the business.
But for 12 years I think peoplehave described the arbitrage
as poor, and so it waspoor when I started.
That's how people described it.
And then it got worse fromthere for the most part,
with the exception of 2021,

(29:16):
I think people thought thearbitrage in 2021 was pretty good
because you had L-I-B-O-R floors
and the money that was addinga nice bit to equity returns
- Note L-I-B-O-R,
floors on loans protected theloan investor at times when
L-I-B-O-R was near zero lib,
BOR floors increased Cielo income,
but Cielo node investorsdo not receive floors

(29:37):
on the base rate.
The market has transitionedfrom A-L-I-B-O-R base rate
to A-S-O-F-R base rate
- Now I think it's improving.
So I think there's more
and interesting opportunitiesin the primary market.
One of my observations also is just that
whenever you hit a periodwhere risk is up on the loans,

(29:58):
the discounts that they trade
to is never what's realizedin terms of loan losses.
So for example, like whenI'm buying a CLO equity piece
and there's loans trading below 90,
you're gonna make someadjustments there in terms
of the price you're gonna pay.
But the reality is all those reserves
that people take whenthey're buying CLO equity,

(30:18):
in my experience, theactual loan losses tend
to be much less than what peopleare actually reserving for,
and the result is favorable returns over
extended periods of time.
- Yeah, I think if the managercontinues to get credit rates
and take appropriaterisk, that's a big driver.
Sometimes I think the worstthing is a manager in my
experience that you can do is with faced

(30:40):
with a loss on a loan, try to replace it,
buy something else at adiscount to mitigate the loss,
and which ends up beinga worse loan than the
one you initially had.
Then kind of create more losses.
But that also gives, creates,I think there's majors
who have done very wellbuying loans at a discount
and replacing some of the lossesin the portfolio over time
and rebuilding the portfoliosto a healthy state.

(31:03):
- Yeah, it's been avery resilient product.
So Evo, thanks so muchfor coming on the podcast.
Really enjoyed chatting with you
and good luck building out the platform.
- Shao, it was a real pleasure.
Thank you for having me andgood luck with the podcast.
- The content here is forinformational purposes only
and should not be takenas legal business tax

(31:25):
or investment advice
or be used to evaluate anyinvestment or security.
This podcast is notdirected at any investors
or potential investorsin any Flat Rock Global
Fund definition.
Section A UM refers toassets under management,
the secured overnight financing rate.
SFR is a broad measure of the cost

(31:46):
of borrowing cash overnight collateralized
by Treasury securities.
The London Interbank offerrate L-I-B-O-R was a broad
measure of the cost ofborrowing cash overnight
for banks on an unsecured basis.
Leveraged loans arecorporate loans to companies
that are not ratedinvestment grade broadly.
Syndicated loans areunderwritten by banks, rated

(32:06):
by nationally recognizedstatistical ratings organizations
and often traded by market participants.
Middle market loans areusually underwritten
by several lenders with the intention
of holding the investmentthrough its maturity.
Global financial crisis
or GFC refers to thebanking downturn in 2008
and 2009.

(32:27):
Junior Capital is financing
that has a lower priorityclaim in debt repayment
to a secured term loan spreadis the percentage difference
in current yields of various classes
of fixed income securitiesversus treasury bonds
or another benchmark bondmeasure yield is income returned
on investment such
as the interest receivedfrom holding a security.

(32:48):
The yield is usually expressed
as an annual percentage ratebased on the investments cost.
Current market value
or face value amortization is the process
by which the CLO repays its financing
after the reinvestment period ends.
General disclaimer section references
to interest rate moves arebased on Bloomberg data.

(33:08):
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and a portfolio is assigned
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or Fitch as an indication
of an issuer's credit worthinessratings range from triple A
highest to D lowest bonds rated Triple B
or above are consideredinvestment grade credit ratings.

(33:31):
Double B and below are lowerrated securities, also known
as junk bonds.
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and are not meant to describethe investment merits of
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to securities of those companiesunless otherwise noted.
All discussions are based onUS markets and US monetary

(33:54):
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and do not necessarily represent the views

(34:15):
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(34:37):
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(35:00):
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(35:20):
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