Month: May 2024

The CLO Investor Podcast, Episode 4

Shiloh:

Hi, I am Shiloh Bates and welcome to the CLO Investor Podcast. CLO stands for collateralized Loan obligations, which are securities backed by pools of leverage loans. In this podcast, we discuss current news in the CLO industry and I interview key market players. Today I’ll be joined by Ivo Turkedjiev, a broadly syndicated CLO manager at New Mountain Capital. The CLO manager is the entity that picks the initial loans for the CLO and keeps it fully invested during its reinvestment period. The CLO manager also works to ensure the CLO passes all of its many tests. New Mountain manages approximately 40 billion of AUM, of which 10 billion is in credit products, both middle market and broadly syndicated loans. I asked Ivo to join me today because of the strong performance of the CLOs he manages. Some of the topics for today’s podcast include New Mountain’s approach to credit investing, loan recoveries, and the path to building a successful CLO management platform. Now let’s get started. Ivo, welcome to the podcast.

Ivo:

Thank you so much for having me, Shiloh.

Shiloh:

Great. Well, you and I have known each other for quite some time now. Why don’t you take a little bit of time and tell our listeners a little bit about your background?

Ivo:

Sure. I got involved in the leverage loan space. It was my first job out of college. Started in 2001 at Lehman Brothers in the leveraged finance group, underwriting leveraged loans and hired bonds. Timing was somewhat challenging Two months after I was on the job. Nine 11 happened, we didn’t even have an office, worked out of a hotel for several months until Lehman bought a building from Morgan Stanley and moved to the current bar 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 NASDAQ was trading down massively and the nine 11 happened and there was this expectations almost that all markets are shut and are we even going to be working? Yeah,

Shiloh:

I remember

Ivo:

Lo and behold, two months after nine 11, I worked on a bond deal out of a hotel room in Midtown and the market opened rates were coming down and what was a pretty small institutional leverage loan market at the time, it was about 150 billion. It was really an emerging market really started growing as lower rates and more activity from private equity sponsors really boosted the market. But the other thing that was really boosting the market, and I didn’t know much at the time, was the emergence of a CLO product, which was really expanding. The technology was proven at that point and when more managers were getting involved and expanding what was a pretty tiny market.

Shiloh:

And so how did you end up at New Mountain?

Ivo:

So as Lehman, I actually moved to the buy side in 2003, worked for a shop called GSC Group, and I was hired because we were doing our first a regular way CLO at that time at GSC group and we’re looking to grow the business and I started as an analyst and then pretty quickly got 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 really learned a lot about CLOs, how CLOs work on the spot kind of thrown in the line of fire. 2008, once Liman filed, leveraged loan prices declined in a very substantial way. Every other loan was triple Co almost. That’s how it felt. So the CLOs got really stressed and it’s interesting adults times, very few people, I mean there was some doubt in the market whether CLOs can survive the stress of a Lehman because that’s not what was modeled at the time.

And pre Leman CLOs actually were more levered than they are today. There was more risk in the structure. The equity cushions were thinner and there was more leverage through every tranche all the way down to the bottom of the stack. Yet the deals did very well. I think to the surprise of a lot of people, the self-healing mechanism, the ability to buy cheap collateral. What ended up happening is a lot of the 2060 2007 vintage deals ended up being great deals, which nobody could believe me because at the time I remember everyone thought that these transactions would fail and they didn’t. And I think post Leeman C market really took off. So actually prior to joining New Mountain, I spent almost a decade at Invesco where had various roles, but one thing that I led the CO liability investment book, we managed over a billion of CO liability investments across a couple of different strategies. So that showed me a different aspect of the CO world, not just as a manager, but also as an investor. So that was a very interesting experience. And then in 2019, I joined New Mountain to start the seal of business here at New Mountain.

Shiloh:

And so what attracted you to New Mountain?

Ivo:

New Mountain at the time when I joined the company had been around for almost 20 years. I actually got involved in the credit business right after Lehman as well, seeing an opportunity to buy loans of companies. That New Mountain, which the core private equity firm started as a private equity firm, a lot of accumulated sector knowledge and company knowledge. So when the ability to buy loans of companies that were fully underwritten at 60 cents on the dollar appeared, that was viewed as a very attractive opportunity. That portfolio allocation from a private equity fund at the time later on when to become our publicly traded BDC, new Mountain Finance Corporation, NMFC, that’s how the credit business started. And at the time when I joined New Mountain, had a really good track record of really protecting the downsides, the defensive growth mentality that we employ across all our strategies had really translated to a very low defaults rates and net gains in some of the broadly syndicated portfolios. So I thought that the firm had a really differentiated strategy and ability to analyze credit and there are over a hundred CLM managers out there, but not all of them have differentiated strategies. And I thought that I had an opportunity to create a CLO manager with the firm’s backing that was differentiated and could provide an alternative to investors.

Shiloh:

I think one of the things that appealed to me about your platform besides the track record is just that my understanding is that a lot of the loans, their LBOs were your private equity folks. They’re probably not the buyer of the company, but maybe they participated in the auction, they did due diligence on 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,

Ivo:

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 defensive growth 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, we seek to identify companies that are a cyclical that can grow and do well no matter what the general economic cycle to get there. We spend a lot of time studying industries, developing relationships within industries, getting to know companies, getting to know players, bringing a lot of executive talent from those industries as part of the New Mountain Network, in addition to companies that we’ve evaluated directly at some point in the past, we also have the ability to reach out to this broad network that we have developed and really help our credit team verify the thesis, make sure that we’re not missing stuff. You can talk to people that are operating in the industries we’re investing in day to day, and that can help us really identify potential pitfalls and risks that just sitting at the desk here in Manhattan, our analysts might not be able to identify. I think that’s really the differentiation that we’re bringing. Again, combined with sector thesis, avoiding deeply cyclical sectors where our view is that companies don’t ultimately control their own destiny.

Shiloh:

So a broadly syndicated loan. If Bank of America or JP Morgan is the underwriter, let’s say it’s a billion dollar loan, and they have to decide who they’re going to allocate that to today, a lot of times the loan’s oversubscribed, so there’s more demand for the loan than supply. Could you talk a little bit about how you think you guys are treated in that process by the banks and if you kind of punch above your weight in terms of the allocations that you get?

Ivo:

Great question. In a market like today, pretty much every new issue, loan transaction, this oversubscribed, there’s a lot of demand for loans right now on the market’s been really ripping higher for the last six months and new issue loans tend to be attractive. They come at a slight ID slight discount to par in a market where a large portion 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 for new issue allocations. I think the way we differentiate ourselves and punch above our weight as you put it, we do have really good relationships with sponsors. We do have a direct lending private credit business where we cover sponsors, develop relationship with these sponsors. So

Disclosure AI

Note in CLO jargon, a financial sponsor refers to a private equity firm.

Ivo:

That certainly is helpful when looking for favorable allocations. But in addition, as a sponsor ourselves, we’re active in the market financing our portfolio company. So that leads to some pretty good relationships. Our capital markets desk has really good relationships with the banks, with the underwriting banks as well, and we’re often making calls to these desks on our behalf to get a better allocation. But yes, it’s a market in which everyone is looking for their little advantage and we believe we have a couple in our pocket.

Shiloh:

So you’re in the process of building out the CLO platform there. Could you talk a little bit about just some of the challenges to getting a CLO platform up and running and how you guys have tackled those?

Ivo:

So in 2019 when I joined, we had to build the business from the ground up. What was helpful is we already had a credit business, as I mentioned earlier. So we had back office, middle office functions in place, compliance functions I benefited from a lot of the groundwork was there, but we had to set up OSCE business from scratch. What we chose to do is we chose 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 to cover all the 200 plus loans that typically go into A CLO origination and trading. Other areas where we had to expand. We hired a couple of folks that used to be CLO bankers joined me to help with structuring deals and monitoring existing transactions. So it’s a lot of work. Those first 18 months felt like the workday never ended, but pretty happy with the way things turned out. And of course my timing this time also was not great. We were six months into it when covid happened, so that threw a little bit of a range. But again, the CLO market rebounded pretty quickly and in October of 2020, we issued our first transactions. We were the first new manager to come to market after Covid and after Covid, the market came back as robust as ever. So the good thing about CLOs is it’s a market that again, has withstood the test of multiple events and

Shiloh:

have a lot of challenges,

Ivo:

A lot of challenges and keeps coming back.

Shiloh:

So at some point I imagine you’re going to want to be on all the approved lists in Asia where a lot of times you get the best debt execution there. And from my perspective as a CLO equity investor, good returns are generated both by returns on the assets that you’re managing, but also getting good debt execution. So what’s the process like in kind of educating these investors about the merits of your platform?

Ivo:

Sure. I agree a hundred percent with you that getting good debt execution is crucial to getting good equity returns and building the platform. As a newer manager, it was very important for us to get our story out and that requires a lot of investor outreach. Last month I’ve been to both Asia and to Europe speaking with investor, selling the new mountain story, showing our performance and our differentiation and sharing views on the market. That’s a repetitive process. Again, once you get on investor screens, they want to follow your performance for some time. But I think again, with more differentiated story and good performance, good performance has certainly been very helpful in getting on more and more investors approved lists, which again is crucial to tightening the spread on the liabilities and creating better equity arb for our investors.

Shiloh:

What do you think the biggest metrics the Asian investors are looking for on the debt? It seems to me that the approved lists, there are a big function of just name recognition, so that’s certainly helpful, but are they focused on the equity residual value at deals? Are they focused on how many defaulted loans or triple C rated loans? I mean, there’s tons of metrics, right? So are there any that they are particularly focused on?

Ivo:

I think some of the metrics that probably Japanese investors care a little bit more about, they care about the size of the platform. You often hear that three or 5 billion number of a UM is a minimum for an investment for a lot of the larger banks over there. In addition, track record linked of the track record three to five years track record is also very important. In addition to all the other metrics that you mentioned that I think most investors pay close attention to diversity of the portfolios, the average rating as well as Triple CS downgrades. These are all metrics that investors often ask about. They want to understand the strategy of the manager and as well as Triple CS downgrades. These are all metrics that investors often ask about. They want to understand the strategy of the manager and

Disclosure AI:

Note the range of CLO management strategies include how much diversity there is in the loan pool, if the spread on the CLO loans is low or high, and whether the CLO manager purchases second lien loans or bonds subject to the constraints of the indenture,

Ivo:

They do want to make sure that you’re following the strategy. I think as an investor, when I was investing, the last thing that I wanted to see was a manager who changed strategies Often that made the investment less predictable and it wasn’t easy to evaluate because if you’re investing, if a manager fits one strategy within a broader portfolio and then shift to a different strategy, that’s something that as an investor I did not appreciate. So I think that’s something that investors are focused on as well.

Shiloh:

I’ve never bought a aaa, but I imagine that from that perspective, none of ever defaulted. So that’s great. But you do have things that you care about would be is there a risk that I get downgraded to aa maybe that matters for capital charges around the bank. And then there’s also just kind of the platform risk where, I don’t know, a couple of senior guys leave and there’s a transition and a for aaa, I mean it’d be worse for the equity, but at the aaa, they want to see some stability, a big platform with a deep bench where whoever bought the AA isn’t going to have to explain anything kind of up the chain at the bank they’re investing from. I guess that’s the priority for those guys.

Ivo:

Yeah, no, I certainly agree with that.

Shiloh:

So I think CLO equity has had a very good last year, 2023, and then this year the trend’s continuing. So we feel good about that. I think there’s a lot of upside coming this year in terms of refis and resets, but the one headwind really I think has been loan recoveries. And so your deals have performed very well. But across the market there have been some recoveries where I guess the first lane lenders found out that they weren’t as senior and secured as they expected to be at the end of the day. So could you talk a little bit about recovery rates, where you see that going and what you do to make sure that you’re in deals where the legal documentation is up to par, if you will?

Ivo:

Sure. It’s a great question. Obviously I think this is something that we spend a lot of time talking about internally, and it’s been a big topic in the market. I think several factors are really 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 to make their interest payments combined with the inflationary challenges that we had in the economy, supply chain disruptions, et cetera. The first companies that really defaulted were companies that in some cases should have defaulted a long time ago that had kicked the can down the road. And vision is probably the name that comes to mind as a poster child for that. Companies that had restructured multiple times in attempts to create more runway for the company when the reality 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 those situations ended up looking worse than they should have been because again, we had a situation where more and more debt kept coming into the business to provide a runway and ultimately impacting layering existing layers and impacting recoveries.

Disclosure AI:

Note, the layering of debt refers to the company taking on additional debt with a higher seniority than the existing debt layering is not permitted in most first lien loan credit agreements.

Ivo:

The second driver for me 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 with technological innovation became apparent that the long-term outlooks for that business are not good and the valuation kept coming down and as a result, the recoveries did not look good. The third factor and the one that we’re spending a lot of time on is the new liability management exercises that have really started to define restructurings in the loan market. Perhaps for listeners who are less familiar with the markets, with loans, the loan documents, you have a first lien package and on almost all assets typically, however, in good markets like we had in 2021 where we had a lot of money chasing deals, the covenants deteriorated and sponsors got a lot of leeway to layer debt to do things without lender approval.

Those openings created the ability for investors to come in, take advantage of these loopholes, layer the existing debt and impact negatively recoveries. It’s an unfortunate development in the market, one that we’ve been vocal against, but that certainly has impacted recoveries. And that leads, to answer your question, your initial question, how do you protect from the ace, the good deals, the deals that everybody wants? Kind of as you mentioned earlier, the oversubscribed deals, they’ll understand they have not a lot of leverage pushing back on covenants and the loan docs. So that’s necessitate really strong views on credit. Kind of going back to the way we believe we protect our investors is really by doing a lot of work upfront and making sure that we invest in businesses that have low probability of having to use these buckets, having to use these liability management exercises that ultimately could impact recoveries.

So I do think that over the next couple of years, the defaults that are going to come will have better outcome because I do think that those defaults will really be driven by good businesses that have bad capital structures that got a little overlevered when rates were zero, that could not stay prolonged 5% interest rates. So FR levels and as a result, need to restructure the balance sheets to rightsize the debt. So I do think the recoveries there will be better, but the one wild card is again, the direction in which these liability management exercises will take, and that provides a little bit of uncertainty.

Shiloh:

I think most CLO equity investors assume there’ll be a 70 cent recovery at the end of the day. Should we think of that as a number from the past or is that still attainable if you’re with the right manager and in the right deals?

Ivo:

I do think it’s a number that’s still obtainable, but I think as a market, I do expect recoveries to come a little bit lower than the historical average. I remember 10 years ago we were using 80, that kind of went down to 70. So we’ll see if time will tell what the right numbers. But with the emergence of more loan only structures and some of the leeway in the documents and these liability management exercises, which reduce recovery is kind of upfront, I do think that it’s reasonable to assume that the numbers should be a little bit lower than 70.

Shiloh:

One of the things we’ve seen in just how default rates and recovery rates are reported is that usually what makes it into the journal or to Bloomberg is the defaults and recoveries of the overall loan index. And that could be an interesting number, but what we kind of care about is the default and recovery rate in CLOs, which have a more conservative slice of that index. And then beyond that, hopefully your CLO investor is able to add value and be with managers where it’s even a more favorable cut of the loan universe. So some of the loan recoveries that were low just weren’t in CLOs anyways, so it was like a interesting headline, but more of an issue for maybe a distressed semester or A BDC. So that’s what we saw there.

Ivo:

I can say managers have gotten very sophisticated and generally manage downgrade risk and manage the fault risk before it happens. So what we do is when we see deterioration in quality and performance, we look to usually pare down the positions, seeing that we might’ve gotten the initial underwrite slightly wrong, or the company just underperformed something in the market changed. And I do think that with a lot of the restrictions that CLO indentures put on managers, most managers are very focused on protecting the downside and tail risk within their portfolios.

Shiloh:

So then there’s significant upside of my opinion for the equity coming this year from refis and resets. So we basically have mapped out all of our deals when a on-call period comes off, if there’s something to do, it could be a refinancing, it could be a reset, it could be nothing. It could be we’ve already got a good capital structure and we’re just going to take it forward. So how do you guys think about the optionality and maybe some modeling you do to kind of determine what you think the best path is for your CLOs? After the on-call expires,

Ivo:

Once the deal is out of the on-call period, we’re regularly evaluating what are the options, where is the capital structure and the money, or do we have a chance to reset the capital structure, lower the cost of liabilities, extend the deal, et cetera. So that’s part of just a regular monitoring process, and it’s always the questions once the perfect time to do it. If you wait for the absolute perfect moment, you risk the market moves away. So that’s something that factors into that decision as well. Yeah, sure, the market could tighten another 10 bips from the liabilities, but I also might miss my window of opportunity here. So it really is on the case by case basis. We look at where the deal is from a par perspective, the portfolios, how reset all the portfolios, are there any assets that have to be excluded, talk to our equity investors, get their thoughts on what the optimal timing is as well.

But it’s an ongoing process for sure, and what you’re seeing right now is I think a lot of the deals that are coming for Visa were the deals that were done in 22 and 23 that have higher cost of liabilities, where the reset is what I would describe as a no-brainer. You’re able to lower the cost of liabilities in many cases by 40 50 bps, creating a much better outcome for the equity or older deals that were done pre covid that are towards their reinvestment period. But if you have a clean portfolio, you have the ability to do something creative with the deal and reset it and extend it, or in some cases just refinance the liabilities, lower the cost of capital and keep the arbitrage going longer.

Shiloh:

One of the things we’ve seen for the 2021 vintage where we got really good debt 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 pretty far from the case. It’s actually true in middle market CLOs, it’s different, but in broadly syndicated, there’s so much flexibility to reinvest after the reinvestment period ends. So that typical indenture says the reinvestment period’s up, but if any loan optionally prepays, you can reinvest it subject to some constraints there. But the point is that every loan repayment almost is unscheduled. So we’ve seen a lot of deals continuing to invest two years post the reinvestment period ending. So I think that kind of ties a little bit into the refined reset conversation in that just because the reinvestment period is ending, if you have a good AAA or cost down the stack, you might be able to keep the CLO pretty full for B or plus, depends on prepayment rates and other things. If you have that good debt execution, there’s no rush to move into something else.

Ivo:

Great. I think the flexibility is there, and again, certain managers are more aggressive than others on reinvesting proceeds, but it definitely needs to study the doc as an investor, especially if you’re investing up the stack. If you’re a AAA investor, that becomes a very important part of the conversation.

Shiloh:

Yeah, if you’re a AAA from 2021, you just want your money back as soon as possible and you could reinvest it wider spreads today. So wanted to also ask, what’s one or two things that you find interesting about the CLO business? I mean, you kind of mentioned self-healing, which would be at the top of my list, but what’s one or two other things that are unique and fun about CLOs?

Ivo:

I think the clo o markets, as a manager, as an investor I guess as well, you’re always chasing the perfect arbitrage and there’s always, again, a lot of things have to align for that to happen, and it’s a very dynamic ative process of trying to pick the best timing. So that’s something that I enjoy. What is the perfect timing to come to the market with a deal and that process, creating the transaction lighting everything up, I find pretty exhilarating. The other thing that I find very fascinating about the asset class is that I think that’s something that you had mentioned before on your podcast is that the 2007 transactions that everyone thought would be real duds ended up being great deals, and that I think every market offers an opportunity even it would maybe consider to be a bad market. You have the ability to buy loans very cheap, create real principle appreciation within the portfolio, which could really drive returns in a really good market. You have the ability to lock in cheap liabilities, which create a lot of optionality to take advantage of market dislocations over the reinvestment period. So again, a dynamic product that every deal is kind of unique. Every deal has its own dynamics, and every market offers an opportunity.

Shiloh:

I started buying CLO equity about 12 years ago, and the arbitrage has always been kind of a funny concept for me. So if you study finance in grad school, you learn arbitrage is riskless profits. You buy a stock in one market and sell it in another and you make money and CLOs arbitrage is not riskless at all. That’s definitely not the business. But for 12 years, I think people have described the arbitrage as poor, and so it was poor when I started. That’s how people described it. And then it got worse from there for the most part, with the exception of 2021, I think people thought the arbitrage in 2021 was pretty good because you had lib IBOR floors and the money that was adding a nice bit to equity returns.

AI Disclosure:

Note LIBOR floors on loans protected the loan investor at times when LIBOR was near zero. LIBOR floors increased CLO income, but CLO note investors do not receive floors on the base rate. The market has transitioned from a LIBOR base rate to a SOFR base rate.

Shiloh:

Now I think it’s improving. So I think there’s more and interesting opportunities in the primary market. One of my observations also is just that whenever you hit a period where risk is up on the loans, the discounts that they trade to is never what’s realized in terms of loan losses. So for example, when I’m buying a CLO equity piece and there’s loans trading below 90, you’re going to make some adjustments there in terms of the price you’re going to pay. But the reality is all those reserves that people take when they’re buying CLO equity, in my experience, the actual loan losses tend to be much less than what people are actually reserving for, and the result is favorable returns over extended periods of time.

Ivo:

Yeah, I think if the manager continues to get credit rates and take appropriate risk, that’s a big driver. Sometimes. I think the worst thing is a manager in my experience that you can do is faced with a loss on a loan, try to replace it, buy something else at a discount to mitigate the loss, which ends up being a worse loan than the one you initially had. Then kind of create more losses, but that also again, creates, I think there’s majors who have done very well buying loans at a discount and replacing some of the losses in the portfolio over time and rebuilding the portfolios to a healthy state.

Shiloh:

Yeah, it’s been a very resilient product. So Ivo, thanks so much for coming on the podcast. Really enjoyed chatting with you and good luck building out the platform.

Ivo:

Shiloh, it was a real pleasure. Thank you for having me and good luck with the podcast.

Disclosure AI:

The content here is for informational purposes only and should not be taken as legal business tax or investment advice or be used to evaluate any investment or security. This podcast is not directed at any investors or potential investors in any Flat Rock Global Fund.

Definition Section: 

AUM refers to assets under management 

The secured overnight financing rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. 

The London Interbank offer rate (LIBOR) was a broad measure of the cost of borrowing cash overnight for banks on an unsecured basis. 

Leveraged loans are corporate loans to companies that are not rated investment grade broadly. 

Syndicated loans are underwritten by banks, rated by nationally recognized statistical ratings organizations and often traded by market participants. 

Middle market loans are usually underwritten by several lenders with the intention of holding the investment through its maturity.

Global financial crisis or GFC refers to the banking downturn in 2008 and 2009. 

Junior Capital is financing that has a lower priority claim in debt repayment to a secured term loan 

Spread is the percentage difference in current yields of various classes of fixed income securities versus treasury bonds, or another benchmark bond measure 

Yield is income returned on investment, such as the interest received from holding a security. The yield is usually expressed as an annual percentage rate based 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 are based on Bloomberg data. The credit quality of fixed income securities and a portfolio is assigned by a nationally recognized statistical rating. Organizations such as Standard and Pores, Moody’s or Fitch, as an indication of an issuer’s credit worthiness ratings range from triple A highest to D lowest bonds rated Triple B or above are considered investment grade credit ratings.

Double B and below are lower rated securities, also known as junk bonds. Any mentions of specific companies are for reference purposes only and are not meant to describe the investment merits of or potential or actual portfolio changes related to securities of those companies unless otherwise noted. All discussions are based on US markets and US monetary and fiscal policies. Market forecasts and projections are based on current market conditions and are subject to change without notice, projections should not be considered a guarantee. The views and opinions expressed by the Flat Rock global speaker are those of the speaker as of the date of the broadcast and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions, and Flat Rock Global Disclaims, any responsibility to update such views. This material is not intended to be relied upon as a forecast, research, or investment advice.

It is not a recommendation offer or solicitation to buy or sell any securities or to adopt any investment strategy. Neither Flat Rock Global nor the Flat Rock Global Speaker can be responsible for any direct or incidental loss incurred by applying any of the information offered. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment related course of action as neither Flat Rock Global nor its affiliates are undertaking. To provide impartial investment advice, act as an impartial advisor or give advice in a fiduciary capacity. This broadcast is copyright 2024 of Flat Rock Global LLC. All rights reserved. This recording may not be reproduced in whole or in part or in any form without the permission of Flat Rock Global. Additional information about this podcast along with an edited transcript may be obtained by visiting flat global.com

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The CLO Investor Podcast, Episode 3

Shiloh:

Hi, I am Shiloh Bates and welcome to the CLO Investor podcast. CLO stands for collateralized loan obligations, which are securities backed by pools of leverage loans. In this podcast, we discuss current news in the CLO industry, and I interview key market players. Today I’ll be joined by David Williams, one of our industry’s prominent CLO bankers. A CLO banker, sometimes referred to as a CLO arranger, is the person responsible for bringing a CLO to life. That includes arranging all of the financing for the CLO and mediating the negotiations between the CLO’s many constituents. A CLO banker earns a fee when the CLO is created and that usually ends their involvement in the CLO. Some of the topics for today’s podcast include strong CLO issuance, refis and resets, CLO profitability and opportunities and challenges in the CLO market. Now let’s get started. David, welcome to the podcast.

David:

Really appreciate the opportunity to speak to you.

Shiloh:

I know we’ve known each other for over a decade now, but why don’t you take a few minutes and just give our listeners an overview of your background.

David:

I’ve been in the structured credit space for just under 20 years. I recently joined Scotia Bank, actually almost coming up on my one year anniversary, in May of last year. Before that I was at Natixis, and at Natixis, I was running the credit group and also global syndication for structured credit within Natixis. That included CLOs, both middle market and broadly syndicated and financing business.

Shiloh:

Okay, and what does a head of syndicate do in the CLO business?

David:

Well, before I was the head of syndicate, I was actually doing more of the day to day where I was basically the intermediary between sales and banking and I helped liaise between the manager and the banking team to help get CLOs basically up and down and priced and source interest up and down the capital structure for the deals to be able to get best execution for our managers so we can get repeat transactions.

AI:

Note in CLO jargon, CLO notes, CLO liabilities, and the CLO stack all refer to the same thing. These are the multiple securities that are issued by the CLO to finance itself.

Shiloh:

So is that a little bit like herding cats?

David:

There’s a lot of herding cats and you have to make both sides happy at all times. So investors and managers, it’s a delicate balance and not always the easiest, but I find that if you can be successful and you can find that medium there, hopefully that leads to a successful repeat business and you want to come out where everybody is happy, not too happy because that means you did something poorly on one side or the other. So you want everyone to be moderately happy I think.

Shiloh:

So now you’re at Scotia and there’s a lot of CLO bankers out there. So how do you guys differentiate your platform?

David:

I think that we were able to be quite successful at my former shop. That being said, Scotia is really giving us a lot of tools here to build out the franchise the way that we collectively see how to build a successful business. At the end of the day, I think you need a bank that has the appropriate risk tolerance and by risk tolerance we are par lenders to par lenders. So I don’t think we’re doing anything abnormal, but you certainly need to have a balance sheet. You need to have the capital from a personnel perspective, from a distribution perspective, and you also need a bank that is going to be supportive in good and bad times and very relationship oriented. And since I’ve gotten here a year ago, Scotia has not only been supportive from a balance sheet perspective and helping us giving the tools and risk and really developing the credit franchise, but also from a personnel and to make sure that we mitigate all execution risks and that we are bringing the right deals to market and giving our new risk group not new risk group to Scotia, but the risk group with regards to structured credit comfort there.

We do things a little bit differently at Scotia and some other banks are certainly I think following suit or taking this business model. But back to your core question, I think that there are a lot of CLO arrangers out there. I think that we’re going to differentiate ourselves with being involved both in the private debt middle market side of the landscape and also on the broadly syndicated side and basically come with creative solutions from a financing perspective to our clients. And I think that’s hugely important.

Shiloh:

So what I’ve seen, especially on the middle market side, is that the banks that have the most success are really also the banks that like to lend against the loans. So before the CLO is formed, often a CLO warehouse is put in place to acquire loans. If a bank actually wants to provide the leverage in a warehouse, that’s very useful for the CLO formation. And if the bank doesn’t like that risk for whatever reason, then it’s hard to be at the top of the middle market league tables.

David:

I think that’s a great point. Fortunately I think Scotia has a great DNA with regards to lending and lending to the right partners, and I think picking those partners are hugely important. You really need to eat your own cooking in the sense that you are living with these loans prior to a full CLO coming to fruition and you need a bank that is going to be supportive with lower diversity with regards to funding those assets prior to having enough diversity to go into a CLO. So there needs to be a real comfort with the underlying assets but also the platforms across the board and you have to make sure that you are banking the right partners and you’re aligned in all of your interests.

Shiloh:

So the CLO industry is really off to a really strong start this year. So in terms of new issues, we’ve seen about 60 billion already as we’re talking here, at the end of April, and 50 billion of refi and reset, reset being just an extension of the life of the CLO, what do you think the key drivers of all the CLO business is today?

David:

I think that the CLOs have been around for I guess upwards of 20 years now and really taken a life of its own I would say since the mid-teens. And as CLO creation happens, there are different markets and liabilities are issued at different times, assets are aggregated at different times. We’re seeing a massive wave of refinancings right now and a lot of that is from legacy transactions that either have come out of reinvestment period and that are amortizing that are paying down. And sometimes that is because they have very attractive costs of debt and liabilities right now, but at some point in time the manager and the equity wants to extend that and doesn’t want to lose the assets. And then on the other side you have deals that were done at called the last 12, 18, 24 months where the liabilities in the CLO debt was at much wider levels and you’re seeing an opportunity to really decrease your cost of funds and decreasing your cost of funds will ultimately lead to, and these are actively managed portfolios as long as you avoid significant defaults of the portfolio, that should all be accretive to your equity investors.

So we’re seeing a huge wave of refinancings from both legacy deals that were coming out of reinvesting period, and then also more recent deals with higher liability costs on top of the new issue wave.

Shiloh:

So we’ve seen the cost of the AAA come down substantially over the last year. What do you think’s driving that? Is it just the banks were on strike for the last two years and now with economic conditions improving, their appetite for the top of the CLO stack has come back or you’re talking to these banks, so why don’t you give us some insight there?

David:

I think it’s a mix. I think most recently we’ve certainly seen a handful of the US banks who are the largest and Japan is the close second, and if you actually mix the two, the Japanese and the US banks are the largest buyers of AAA CLOs. But we’re also seeing new investors come into this space from different regions. And it’s not just geographic locations, it’s different types of investors. It’s asset managers and insurance companies and pension funds that historically may not have been comfortable with the three letter acronym because it’s been also associated with the CDO world. I think that that’s worn off after 14 years now finally, and we’re also seeing a lot of a ABS investors I think just realize on a relative value basis, CLOs has historically priced substantially wide to that of the ABS market and these are certainly floating rate products.

Floating area products in high rate environments should be attractive to more investors and you’re not locked into the same rate risk securitization can be used in many different ways, but at the end of the day, CLOs are pools of corporate credit both on the private credit middle market side to the broadly syndicated world, so small, medium, large, mega types of corporates on the underlying. And these CLOs have proved to be resilient over the years and it’s now a 20 plus year market where you can actually look at data all the way from equity to AAAs. And I think that the performance as an asset class has been quite strong and investors globally, whether it’s banks, hedge funds, asset managers, pension funds are recognizing this. And while some have been in this product since day one, there’s a handful of investors that were a little bit slow to get comfortable with the CLO world.

That certainly changed. It doesn’t hurt that it is a floating rate product. Floating rate products and higher interest rate environments are certainly attractive. That being said, higher interest rate environments historically have also led to higher default environments. This doesn’t seem to be the case as of now. We’ll see how that plays out. But at the end of the day, these structures have just proved quite resilient and given the floating rate nature, it is an extremely attractive return versus some of the other asset classes that we’ve seen on a relative value basis. A lot of crossover from traditional flow EBS investors that are now looking at the CLO world because of that performance history.

Shiloh:

And as you talk to the investors in the top part of the stacks, banks and insurance companies, obviously the CLOs cost of debt has been declining, but is that a trend that you would expect to continue throughout the year or is there some type of spread over SOFR where beyond that it’s hard to push?

David:

It’s hard to say that there’s a concrete level. We are probably, or I shouldn’t say probably, but we’re roughly 25 bps. If you look at the LIBOR, so far adjusted spreads about 25 bps wide of the absolute tights of where we got. So there likely is room to run versus historical spreads, but they always look at this asset class as a relative value where they’re seeing elsewhere and I think that they’re every handle. So right now, let’s say AAAs for top tiers at one 50, when I say handle, they say that’s a five to get to the four. There is some psychological barriers to investors. So if you’re able to break that, usually more deals follow and it’s the next shoe to drop so to say. And I think it’s always hard to push to get to those absolute tights and I don’t know if we should be in those absolute tights because there are macroeconomic considerations that we all need to take into account now, and there always were, but more so now we are in a higher rate environment and historically higher rate environments have led to more stress portfolio. So there are concerns, but the performance has been pretty decent and at the end of the day, CLOs have continued to be wide of other fixed income products. So we will and we continue to see demand at these tighter levels.

Shiloh:

Well, from the perspective of a CLO equity investor, I’m definitely going to cheer you on in looking for lower handles on the triple-A cost in terms of stories of higher for longer on rates, it seems like every month or so we have to reset our expectations and fed cuts continue to get pushed out. How does that affect either the AAA rate or your business in general? Just the trend for higher for longer here…

David:

It really goes to how we pick our credit managers and who we’re working with. At the end of the day, these are actively managed goals. If we had a crystal ball, we said that everything was going to be where it was today and not have any significant stress on the portfolios at these rate environments, I think everybody would’ve called us crazy. We understand that there are problems within every portfolio At the same time it goes to a question on how rapid these increases will potentially get or are we going to see substantial decreases From a lending perspective, it seems to be for us a pretty attractive entry point, but there’s always portfolio considerations I think with higher rate environments that you have to be thoughtful and maybe not go all in at once, so to speak.

Shiloh:

So one of the trends we’ve seen in the market over the last two years is that for newly issued CLOs, a lot of times the equity is being bought by the manager themselves and an internal fund rather than going out to a third party equity investor like us. And the reason is that new issue, the initial profitability expectation of CLOs, we call that the ARB has been really poor over the last two years, but in spite of the poor ARB, I guess managers take the deals anyways and I guess we’ll see how those returns work out for them. Is the arbitrage improving here in April of 24 with the cost of CLOs financing coming in?

David:

ARB is hard. There are situations where the ARB might not necessarily look attractive to all CLO investors, but there’s opportunities that present itself that may still make the equity attractive where you can maybe aggregate a portfolio. It might still be lower spread on the asset side, but lower dollar price, so it can be a pull to par trade.

AI:

A pull to par CLO investment is one in which the initial loans are bought at discounts to par. The CLO equity investor expects to benefit from both the cash flows of the CLO as well as price appreciation on the underlying loans.

David:

Some equity investors do take a strong view that they are able to potentially reset these transactions at post and on-call period after one or two years. I think liabilities certainly tightening help. The arb, I think that dealers, not to speak our own book, but we are getting compressed on fees substantially. That doesn’t hurt the ARB at all when you have lower costs. Maybe lawyers have had to compress their fees as well. I think the costs for the overall structure have ultimately gotten more efficient. So all these factors with the cost of CLO creation with tighter liabilities to enhance the overall. Over the past few months, we’ve definitely seen more loan creation, but the competitiveness on the asset side seems to be quite fierce and spreads have compressed to a good amount. So we’ll see what that ultimately does for the yard. But I think you need to be ready from an arranger and from an equity perspective to act when there’s any hiccup in the market and be decisive because even a 25 or a 50 basis point sell off in loans creates opportunity with a levered vehicle. And if you’re able to lock in, attract AAAs or have a structure that is ready to go in short order, those tend to create the best arbitrage opportunities on the CLO side.

Shiloh:

What we’ve found interesting over the last two years really was I think the initial before middle market deals in the primary was attractive. So we were active there and then we also saw pretty interesting opportunities in secondary CLO LO equity, which had sold off quite a bit for broadly syndicated CLOs in the primary. I thought that was a little bit of a tougher trade. The initial returns there would’ve probably projected to be maybe double digits. To your point, you could invest in A CLO like that and if you’re able to do the CLO refinancing or extension in a year or two, then all of a sudden the profitability expectation would increase substantially, but it’s just hard to put all your eggs in that basket. So we weren’t particularly active in those.

David:

I think that what’s really interesting you touched on in the beginning is on the middle market side, I think these portfolios, since they’re originated assets, they take a long time to aggregate the assets. So it could take anywhere from nine months to two years. So right now if you have a portfolio that has call protection and you were able to source that over the trailing called 12 to 18 months and you can go securitize those assets into a CLO at the current middle market spreads, the ARB should work out quite well. Whereas on the broadly syndicated side, you’re aggregating these assets at a much faster pace, mostly in secondary. We have seen the new issue pipeline pick up historically you’ve been able to build portfolios over a longer period of time. I think we’ve also seen a little bit of migration away from the banks with the size of the overall private debt managers out there eating the dinner of some of the banks to an extent and playing in what were previously broadly syndicated CLOs. 

So I think that all takes into account how do you make that our work on the forward pipeline because even with market, a lot of these portfolios, once they get securitized and they’ve been originated for the past 12 to 18 months, there’s a lot of competition on that side too. And maybe those spreads have compressed 50 or a hundred plus basis points. So we’re going to need to see further tightening I think on the liability side on both broadly syndicated in the middle market to make sure that that ARB is still attractive. But I do think that historically the mid-teens on the broadly syndicated and the high teens is where you needed to be to source that third party equity bit.

Shiloh:

Are you seeing new demand for middle market equity or double Bs?

David:

Yeah, so middle market equity I think you know very well and you’ve been extremely successful with your fundraise and with the way that your platform has evolved over time, and I think you’ve seen value for a long period of time in that space. Being able to write a substantial minority ticket alongside the manager is going to allow you to source those opportunities in greater bulk. A lot of these managers, they are financing traits, so they don’t always sell the equity. There’s nothing more important in middle market than alignment of interest. So there are opportunities where you can get majority equity in the middle market, but you know better than everyone that you want that manager having a say in the underlying loans, controlling those loans across all their portfolios, making sure that there’s that a true alignment if anything goes wrong, they are originating these assets, making sure that they have the risk retention structures in place for European investors for US compliance, et cetera. So the barriers to entry and being able to source middle market equity and even double BS can be challenging and you have to be patient, but if you are patient and you have the right partners, it’s proven that you tell us how that straight has worked out.

Shiloh:

So it’s definitely worked out great. But I think I would add to the barriers of investing in middle market equity or double BS for newer guys is that the securities are really only available to onshore investors. So if you’re not dominant out here, it’s going to be pretty tricky to get involved in some of these transactions.

David:

It’s a hundred percent right. There is less than a handful of managers that have seasoning vehicles and it’s very cumbersome to set that up.

AI:

Note a seasoning facility buys middle market loans from the CLO manager and holds them for a brief period of time before they are purchased by the ccie. LOA seasoning facility enables offshore investors to participate in middle market CLO equity and double B rated notes.

David:

If you have onshore money like yourself, it gives you a massive competitive advantage to source these opportunities. And there’s not very many with the deeper pockets like yourself. And you don’t want 20 equity investors in a middle market CLO or frankly, probably even in the broadly syndicated CLO. You want to know who your partners are and the ability to have onshore money really sets you apart I think from the rest of the investor base and you’ll get first looks on transactions. That goes a long way.

Shiloh:

Yeah, I think we’re fortunate in that setup. So you’re a banker, you’re putting the deals together. Once the CLO closes, you guys get paid a fee and then from there on it’s really the CLO manager managing the structure and investors like us getting our cut of the economics, whatever we’ve signed up for. But I know you also sit at a ton of meetings where the CLO manager is talking to investors like us and describing what they think the credit quality of the loans is going in. I was wondering if you could just give us some insights there. Well,

David:

It’s a new business for Scotia and I think Scotia has hopefully we’ve gotten comfortable with the asset class, but also I think the managers need to do, and these are actively managed vehicles, they have to take a proactive view and sure, they don’t seem too fuss. You have to always be wary at that time, but they are evolving in the way that they think about it. I think from time to time, industries go in and out of favor and you need to be thoughtful in higher rate environments. Okay, what are those industries that potentially are going to be more stressed or what industries are going to outperform or perform well in higher rate environments? So I think we’ve seen managers pivot not necessarily on their strategy, but evolve in the way that they think about certain industries. I think for a long time, technology and software was definitely an area that people tried to shy away from and things can change.

Over the past handful of years we’ve seen that part of the market outperform others and not all technology and software companies are created equal, but a lot of them are quite substantial in size and you can even see it in the equities market if significantly outperformed. Some of the blue chips that we’ve been accustomed to thinking are the best and biggest companies out there. And same goes for CLO managers. I think that they’ve evolved and the way that they’ve thought about industries and as actively managed portfolio managers, they’ve had to give some thought on what these rate environments and different environments in general are going to have an impact with regards to their portfolios.

Shiloh:

I think the biggest evolution I’ve noticed from the managers is just that for oil and gas, which was 5% of these portfolios back in 20 15, 20 16, we’re just really not seeing a lot of these energy names in portfolios anymore. And the reason is that it’s just this one risk that’s unquantifiable as a result. I think secured lenders just do not have a lot of appetite for these companies. So you do see some double digit industry exposure in technology, for example, in healthcare, but when you delve into it, it’s literally dozens of different business models. So there’s not one risk that it’s all correlated to like there was in oil and gas years ago or so. I think one other thing I’d point out is that whenever we’re talking about the risk in the loans, what we’re doing really is unique from other loan investing in that every CLO investor I imagine that you talk to for equity for example, is running a 2% default rate through the portfolio.

We know we acknowledge upfront that not all of the 200 loans in the CLO are going to work out as expected, and so we’re budgeting to take losses and we’re still targeting what we think are mid-teen or higher returns net of those loan losses where in other vehicles people are investing, they may look at a yield from a loan fund or a bond fund and they mistake, in my opinion, in that yield for future return. And it’s roughly correct as long as no loans or bonds default, but unfortunately that isn’t the world of high yield credit.

David:

It’s a great point. I think you need to really take into account, you have to change your assumptions, you have to take into consideration what these higher rate environments are going to do for your default assumptions. Also, when the credit markets are quite hot, you have to look at prepayment rates as well, and that’s going to go into the overall economics to your investment. At the end of the day, if you have a portfolio that was originated in a very attractive timeframe and those portfolio companies and those assets are performing quite well, there’s a high likelihood posted on-call period that you’ll get refinanced as soon as they can out of those assets and you need to take into consideration all of these dynamics when you’re looking at any of these investments.

Shiloh:

So after being in the CLO space for 20 years, what’s the one thing you find most interesting about our industry?

David:

I think that it’s still somewhat of a clubby market. It’s evolving. I think I love that we’ve seen an evolution of, call it middle market private credit CLOs, the receptiveness of investors now willing to dive into that part of the market where they never were the stepchild of the market for a long period of time and just the way that the CLO market evolves. You can use CLO technology in a lot of different ways and you’re not going to your job every day and it’s the same thing in and out. You got to be on your toes and you got to really be thoughtful with regards to who you’re working with, who your partners are, and it’s a long game. It’s a long nine innings, and the market ebbs and flows in times of stress, sometimes creates the best opportunities and sometimes when the markets are seemingly great, it tends to be exceptionally slow. You never know what you’re necessarily going to get. But I think working with good people, having new investors, new managers, and even the evolution of the retail market with ETFs, I have my aunts and uncles asking me about various CLO ETFs and interval funds, and I think it’s exciting when the Flat Rocks of the world are able to issue and given different products to investors that historically have not been able to enter this part of the market. And it’s certainly creating for more interesting conversation and makes your job interesting.

Shiloh:

I think it definitely is maybe surprisingly a relationship business. When I started going to CLO conferences a little bit over 10 years ago, the middle market CLO panel was really, if there were 10 or 15 people in the audience, you’d be lucky, and a few of those would’ve been people that were just working on something from the last presentation and didn’t get the cue that it was time to get up and go. And then now the middle market panel is probably as busy as the CLO equity panel. I do think relationships are huge in the space, and one of the things that I like about it is that sometimes we’re buying bonds in the secondary, so the CLO LO already exists and you’re just trying to get a price and it’s a zero sum game, so we’re sometimes buying CLOs that way, but in the primary market is totally different. It feels more like this team process where everybody’s working. You other equity investors, everybody’s pushing for the best steel and it’s somewhat of a team effort to get it over the finish line. And so doing that with people that you, I can respect, I find that very rewarding.

David:

I can’t agree with you more. I can’t remember ever working with a single equity investor one time or a single manager one time. I think you’re all working to a common goal, whether it’s working with the investor side, the manager side, collectively, I think that we are all in this together. We see a long-term future in this product, and relationships are immensely important to getting everything done in the collective success of having a fluid market for the long-term. It’s important for managers to have a liquid illiquid to have both buckets, especially in times of stress, to be able to play in liquid markets that are less liquid. To have a view there to be able to go anywhere with assets just in general is helpful. Yes, there’s certain managers that have not done as well as others in terms of differentiating the platform, and I think that’s hugely important. But if you’re not well capitalized, I think going forward and just the CLO landscape both on BSL and middle market, you’re in for a tough ride. There’s no reason for 150 managers anymore.

Shiloh:

CLO management is a scale business and either you have the capital to do deals in favorable markets and not favorable markets, or you’re just not going to be relevant. And if you’re out of the market for a while and you come back, then your CLOs cost of debt’s going to be elevated and somebody’s got to bear that additional cost from the equity seat. That’s a manager problem. But I think you need to be able to do three or more deals a year with outside capital or not to be relevant in the space

David:

Three deals a year, but tying them appropriately. You don’t want to do a deal just to do a deal, but you couldn’t say better. If you’re not in the marketing a consistent basis, you’re not going to get the right liability pricing if you don’t get the right liability pricing, the equity doesn’t work. So whether it’s three new issues or if it’s two new issues in a reset, I think just having enough transactions to be relevant to your end investor base, that’s going to certainly just improve the cost of financing and the CLO execution going forward.

Shiloh:

Well, thanks again, David. This is really above and beyond the call of duty.

David:

Thank you for having me Shiloh. Really appreciate it.

AI:

The content here is for informational purposes only and should not be taken as legal business tax or investment advice or be used to evaluate any investment or security. This podcast is not directed at any investors or potential investors in any Flat Rock Global Fund definition section. The secured overnight financing rate software is a broad measure of the cost of borrowing cash overnight. Collateralized by treasury securities, leveraged loans are corporate loans to companies that are not rated investment grade broadly. Syndicated loans are underwritten by banks, rated by nationally recognized statistical ratings organizations, and often traded by market participants. Middle market loans are usually underwritten by several lenders with the intention of holding the investment through its maturity. A collateralized debt obligation. CDO is a structured finance product that is backed by a pool of assets other than leveraged loans. Securitization divides cash flows amongst different investors in a pool of assets.

Global financial crisis or GFC refers to the banking downturn in 2008 and 2009. Asset backed securities are securitizations, usually backed by non-first lie and loan collateral. Par lender is a lender focused on buying loans that are not in stress. Risk retention is when the CLO manager acquires securities in its CLO to meet regulatory requirements. Junior capital is financing that has a lower priority claim in debt repayment to a secured term loan spread is the percentage difference in current yields of various classes of fixed income securities versus treasury bonds, or another benchmark bond measure yield is income returned on investment, such as the interest received from holding a security. The yield is usually expressed as an annual percentage rate based on the investments cost, current market value or face value. The Flat Rock Global CLO equity index and its legal disclaimers are available on the Flat Rock Global website.

Amortization is the process by which the CLO repays its financing after the reinvestment period ends ETFR, exchange traded funds. General disclaimer section references to interest rate moves are based on Bloomberg data. The credit quality of fixed income securities and a portfolio is assigned by a nationally recognized statistical rating. Organizations such as Standard and Pores, Moody’s or Fitch as an indication of an issuer’s credit worthiness ratings range from triple A highest to D lowest bonds rated Triple B or above are considered investment grade credit ratings. Double B and below are lower rated securities, also known as junk bonds. Any mentions of specific companies are for reference purposes only and are not meant to describe the investment merits of or potential or actual portfolio changes related to securities of those companies unless otherwise noted. All discussions are based on US markets and US monetary and fiscal policies.

Market forecasts and projections are based on current market conditions and are subject to change without notice, projections should not be considered a guarantee. The views and opinions expressed by the Flat Rock Global speaker are those of the speaker as of the date of the broadcast and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions, and Flat Rock Global Disclaims, any responsibility to update such views. This material is not intended to be relied upon as a forecast, research, or investment advice. It is not a recommendation offer or solicitation to buy or sell any securities or to adopt any investment strategy. Neither Flat Rock Global nor the Flat Rock Global Speaker can be responsible for any direct or incidental loss incurred by applying any of the information offered.

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