Shiloh: Hi, I’m Shiloh Bates and welcome to the CLO Investor podcast. CLO stands for collateralized loan obligations, which are securities backed by pools of leveraged loans. In this podcast, we discuss current news and the CLO industry and I interview key market players. Today I’m speaking with Bilal Nasir, Bank of Montreal’s Head of CLO Trading. When I first began investing in CLO Securities, I found my conversations with CLO traders to be extremely helpful. That’s because I’m both a client of CLO trading firms, but also CLO securities are relatively illiquid, and so CLO traders are, like me, buying securities they expect to appreciate in value. (Though likely they will trade the security away before holding it too long.) During the podcast, Baal uses the term “risk profiles” as a fancy way to describe the different characteristics of various CLO investment opportunities. If you are enjoying the podcast, please remember to share, like, and follow. And now my conversation with Bilal Nasir. Bilal, welcome to the podcast. Thanks for coming on.
Bilal: Hi Shiloh. Thank you so much for having me and it’s a real pleasure. Just at the start, I would like to note that the views expressed here are of my own and not necessarily of my employer.
Shiloh: Got it. So why don’t we start off by you telling our listeners a little bit about your background and how you became a CLO trader.
Bilal: Absolutely. So I started working on Wall Street right out of grad school here in New York and I found myself to be joining a bank right smack in the middle of the great financial crisis. So in September of 2008, I started working within an equity quant group at Lehman Brothers. That lasted for a few months and then the group got disbanded and then I moved into the credit world within Barclays. As you know, Barclays bought Lehman, and I was doing analytics on credit default swaps. In a couple of years from there, I joined BNP Paribas doing, again, mostly quant related stuff. I was working very closely with the structured credit trading desk and in 2012 is when my CLO career really started, joined the desk from there on and I was working at BNP till 2019 as a senior trader. Late 2019 I joined Deutsche Bank to run the CLO trading effort there and I was there till, call it the summer of 2022, and then joined BMO thereafter. So Bank of Montreal at BMO, I oversee the CLO trading effort. I trade both US and European CLO markets. We are an active participant in the market, up and down the cap stack, but specifically focus at the top of the stack, AAAs and then deep mezz and equity. Also trade some niche sectors like middle market and recurring revenue ABS.
Shiloh: Was CLO an asset class that you targeted at one point or was it just something that fell in your lap and you ran with it?
Bilal: So I was working within the structured credit world. I was getting a lot of exposure to bespoke tranches and this was the next big push that, BNP Paribas, the desk there wanted to get involved in, in terms of the primary issuance and secondary trading. So in a way it was something that came up as an opportunity and I got excited about it. I wanted to join the trading desk in general after years of being as a quant. So it fell in my lap, but also it was an opportunity that I saw and it looked like I was joining a very interesting product space.
Shiloh: Great. So Bilal, how are CLO securities traded?
Bilal: So yeah, once a deal is being brought into the primary market, I would say a parallel to that world is the IPO stage of a stock or a company stock offering. So once the deal prices, or it closes, the CLO tranches are free to trade in the secondary market. Investors, generally, they’re looking to buy a certain tranche of a deal in secondary market or they’re looking to sell a tranche in the secondary market. So they’ll access liquidity and they would be looking to sell or trade their positions either outright and that would be a broker dealer like myself or BMO Capital Markets. We make markets in the product and they would come to us and sell the security outright or a broker dealer would facilitate bringing two parties together like a buyer and seller. Typically, as I was mentioning earlier, right when the deal prices, we don’t really see tranches trading off the break. One reason for that is it takes a lot of effort to get allocations in the primary market, as you very well know. It takes some time and these assets are very attractive and interesting for investors. So that’s one notable fun fact.
Shiloh: But is it also, though, that right when the CLO forms after pricing and then maybe closing just that the deal doesn’t have all of its assets yet. So it might have a hypothetical portfolio where 90% of the assets are identified, but there’s some remaining to buy. So isn’t it also that the CLO isn’t fully ramped at closing?
That is a reason that there’s not a ton of trading right out of the gate in these securities.
Bilal: So that’s true, but we were in a market say 2017, 2018, where there was just so much demand for paper where we did see some trading very shortly after pricing. But typically, to your point, there’s a element of the deal hasn’t fully ramped, but also there’s a longer settle date as well. So typically right out the gates when the tranche has priced, there’s a T plus 30 settle date dynamic as well. So you don’t really see tranches trading right off the break.
Shiloh: Okay. So the reason for that delayed settle, though, is that for example, if I buy a stock through my E- Trade account, it closes, it settles the next day, but there’s this delayed settle in the primary, the T plus 20 or 30 that you mentioned, and that really just gives the CLO some time to continue to ramp its assets, so it might not be fully invested. So the delayed settle gives the CLO time, the debt securities are spoken for, but everybody knows the CLO is going to form, but it gives you an extra month of free time to ramp up and get the assets you need into the CLO before the debt starts accruing its interest cost.
Bilal: Correct. And then moving right along, I think each tranche, the way it’s identified, it has a CUSIP or an ISIN
Disclosure AI: Note a CUSIP or ISIN is similar to a social security number for a person.
Bilal: Typically we see a lot of US investors buy the 144-A version of tranches and overseas or European investors, they would look to buy Reg-S.
Shiloh: So the 144-A means it’s a private offering not registered with the SEC, basically.
Bilal: Yes. And then once we are talking about a normal CLO tranche that is past 30 days of its issuance, these tranches typically trade T plus two or T plus one as it’s now cash settled, but that has evolved from T plus three to T plus two to T plus one in certain instances.
Shiloh: And the T there is just the trade date. So t plus one means if we do a trade on one business day, it settles the next.
Bilal: Correct. And then one unique thing in terms of trading when it comes to CLO equity is buyers and sellers typically agree on who collects the upcoming payments. So that’s part of the trade confirmation dynamic or protocol.
Shiloh: So as you know, for me, I’m primarily focused on CLO equity and CLO BB. So one option for me is just to buy these securities in the primary when the CLO is being created, which we do. And then in the secondary market, my options are for buying or selling. I could just reach out to you or another trader directly and offer to sell or buy a position, or I could use an auction process known as bid wanted in competition or BWIC. Why don’t you walk our listeners through how the auction process for CLOs work?
Bilal: So investors like yourself will typically maintain some distribution of all the relevant broker dealer desks in the market, and typically we would receive, or secondary desks receive, an email blast saying we’re looking to sell a portfolio of positions, debt or equity. The heads-up there, generally, is a day in advance and at times we see the same day list with CUSIPs or ISINs or bonds there. Generally that happens when there’s tranches that trade a lot more frequently, like triple A through double B, and then it’s a normal market environment and a lot of people are familiar, they don’t have to do a lot of work there. There’s a specified time of the process. Let’s say it’s 10:00 AM Eastern. The desk will send in bids and there’s a cutoff period or a grace period until which bids are accepted. So it could be 30 minutes, maybe an hour into the process. And then once bids are submitted, they have to be good for a specified time. So typically it’s around two hours, and then the process takes on from there in terms of who gets notified if you’re going to get maybe another round of feedback or not until the results are announced.
Shiloh: What I’ve seen for BBs and equity is that there’s really two types of processes. So one is a best foot forward, and basically that means I’m selling a piece of equity, I reached out to all the investment banks that trade in it and I say, okay, I’m selling this piece of a CLO, this tranche if you will, I’m going to sell it tomorrow at noon or at least take bids for it and in the best foot forward process, I’m going to just sell to the highest bidder. There’s not going to be multiple rounds of bidding, so that’s best foot forward. And then another way to do it, which I think is also common, is to have a top three process. And usually how that works is that of, say, 10 or so bids, or potential bids that you get all at the top three, know that they’re in the top three and they can all bid again. And then the idea there is that whoever finished first in the top three, that person really can’t improve upon themselves so they can increase their bid, but if it turns out at the end it wasn’t necessary for them to do so, then they’re able to buy it using their old bid. Are those the two most common processes that you see?
Bilal: So as you know, these are typically the most common. I think one thing to note around the best foot process is just a much cleaner, a much more transparent process. It’s usually the protocol or the go-to process that we see on upper IG tranches. So AAA, AA, single A, there’s really no feedback given. It’s like lead with your best and the results are notified within a couple of hours. I think on the top three process, yes. So there’s this round of feedback, there is a variation that folks use which is a strict top three versus a light or a soft top three process. So sometimes the risk profiles can have very divergent interests. So there is an element of giving a round of feedback as to maybe if investors are keen to buy a certain risk profile that they can sharpen up. We see that happen quite a bit.
And then it is interesting to note that at times the BWIC process can be a little frustrating because you may or may not have bonds awarded. There’s a certain reserve level that investors have in place and what that really means is that, as I mentioned earlier, these securities are very attractive and interesting and sometimes there’s internal valuation in terms of what would it take to sell the security and also replace it. If you were to think about that and do the levels that you see, or the execution levels that you see, are they in line with that?
Shiloh: So I think if we were working on PhDs in economics, it’s a very common dissertation theme to have a thesis on auction theory and what gets the highest proceeds to the seller. Is it your view that the top three process is the process that’s best for the seller and maybe also for the buyer because they get some incremental information during the process?
Bilal: I think it can be an effective way to get interest, but at times, what we see in the market, sometimes there’s some unique risk profiles that are put out for sale, could be some more storied names, or something that requires a little more analytical understanding. Could be CLO equity. If you access liquidity via a BWIC process where everybody broadly bids at times the interest may not be there. So it is not the most efficient way to get the best liquidity and at times a trade by appointment or what do we call out of comp can also be effective.
Shiloh: So let’s come back to the out of competition sale in a second. So how we’ve done BWICs at Flat Rock, really my whole career, how I’ve thought about it is I’ve just done a best foot forward process. So I just take bids, there’s no color given, and we sell it to the highest bidder or not. So what I’ve seen from that is just that it creates I think more variability in the bids you get. So some bids will be poor and you don’t need them and that’s fine and then other people will really step up. But what I’ve seen is that the best foot forward process creates what I would call big covers. And what that means is after the BWIC, usually some market color on the trade is put out to the market, and nobody tells you where the trade occurred at what level, but they’ll often tell you the cover bid, which is the second highest bid.
So you get some information there. And what I think is that the best foot forward process results in a variability of bids and usually a cover. The highest bid is usually pretty good, and then you can discard the rest. Whereas in the best foot forward process, I think a lot of times, the bids just coalesce around one level, and it may not be the optimal level. I would say if you’re BWIC-ing a security and you actually definitely need to sell it, then the top three process would probably be the way to go. If it’s, hey, I’m BWIC-ing a few positions and I want to sell one or two of them and maybe not all depending on where bids come in, then I think that’s when I would use a best foot forward process,
Bilal: The best foot forward process, if, when the market is very well defined, I think it can be a very transparent process. Typically higher up the stack, you don’t see a lot of divergence, so people tend to use for let’s say AAA, AA or single A securities a lot of best foot forward, there’s a functionality that is available in Bloomberg where people put out these lists and it’s maybe automated, you take the top bid, and then there’s the second best bid, and they both get notified. But I think the top three process can offer some feedback and, at times, folks don’t really want to start very strong and they want to see if their bid is contextual and it gives them an opportunity to then sharpen up.
Shiloh: I think one other challenge with the top three process, though, is let’s say I’m auctioning a few securities and I say bids are due at noon. Well basically no bids come in at noon, they all come in late, at different times. It’s kind of a joke. So you’re never really sure, okay, is 12:45, then, is that the cut where I define the top three? And then what happens if five minutes later somebody else comes in with a good bid and now they’re in the top three? I think it becomes quite a tricky process to manage fairly
Bilal: Totally understand and I agree, of late, I think the frustration that comes along with the BWIC process, it can take a lot of time and at times bonds don’t end up trading. So that adds to the complexity of the process and I think there’s no real ideal way, but it just depends how the process or what process you want to manage. Over time, I think the process has become a lot smoother, whether it’s the best foot forward or top three. As the space has grown, people have just gotten an understanding of what and how things work and it’s, I think from an investor perspective, when you are looking to access liquidity for sure, it’s much easier process to manage on a best foot forward basis. Sometimes you actually get good execution as well because there’s just no back and forth and games. There’s no game theory involved.
Shiloh: That’s right. And then the result of the BWIC process, though, in your experience, lots of bonds just don’t trade. So whatever the best bid was, didn’t work for the seller, and people did a bunch of work, and have nothing to show for it. So how often does that happen?
Bilal: I think it definitely happens more frequently when it comes to the mezzanine and equity tranches and especially when the market gets very dislocated, it’s often used as a tool to maybe share some color and some price discovery data points for everyone to see. This is where the bids came in for this profile. I do think that to my earlier point, some of these risk profiles are just very attractive. So folks are just unwilling to let go assets cheaply if the bid is not very strong. So that’s another undercurrent that we see in the market through the BWIC process that people will just try to use that color to maybe then go find bonds in the context of the bids. So there’s a little back and forth there.
Shiloh: So then instead of using this BWIC auction process, another option I have for buying securities, or selling them, is just work directly with a trader like you. So what’s the advantage or disadvantage of just doing it that way?
Bilal: So I think the process is much easier. I think if you go to or if you work with a desk that specializes in certain of bonds they will have access to or they’ll be in touch with other investors that own those securities so they can really just make the process a lot simpler. There’s only two parties involved, really, it’s the buyer and the seller. And then also I think we’ve seen just the execution level be a lot, I would say stronger or in market context. It’s not theoretical or academic, it’s the real market when you have a buyer looking for a specific profile and a seller looking to sell that specific profile. So it’s much cleaner, it’s much efficient. A lot of bonds do trade that way, what we call by appointment, because folks really don’t want to put them on BWICs and get the desks that may or may not be involved in trading that profile to be sending in bids that are out of context
Shiloh: In the BWIC process for sure, when you get bids for something you’re selling, I would describe it as I get two kinds of bids. So one is a bid from someone like you where there’s an end customer who wants the bond and they have bid it accordingly. The other bid that I would get would be something I think from a trader or a trading desk where there is no end client that wants the bond and so that’s, we’ll call it a back bid, or it’s at a level where the trading desk is comfortable owning the bond and they’ll find an investor to take it later. That’s the strategy there. So you get this tiering of bids in the BWIC and then what I think is translating that or bringing it back to trading out of comp, it seems like a lot of times dealers are getting hit on their back bids in auctions for one reason or another and then they take that bond into inventory and maybe sit on it for a while, trade it away to another investor at a gain. Is that how you see your business model or are you actually pairing buyers and sellers more frequently where you’re not actually holding a ton of bonds in inventory or how does your business model work?
Bilal: So I think the business model on our side is much more we’re trying to make markets and looking for real demand and we like to trade as opposed to build a lot of inventory. So I think it’s mostly market making, bringing buyers and sellers together, and I think we’re just a desk that is comfortable bidding a lot of interesting profiles. So that’s maybe up the stack or deep mezz and equity. So we do talk to a lot of investors that find that part of the cap stack interesting. Hence we have a lot of buyers and sellers that we’re in touch with rather than just holding securities for a long time and sitting on that and taking them down for both. We have certainly the capability to provide liquidity to our end clients whenever it’s needed. At times you may not find a buyer that same day, but certainly we like to turn the book over and bring buyers and sellers together and like to trade more frequently than other desks.
Shiloh: So it sounds like you can invest and trade up and down the stack. Are there any securities out there today, issued by CLOs, that you find particularly compelling?
Bilal: It’s hard to get overly excited about the market given we’re sitting on CLO debt spreads and yields, and the broader credit markets, sitting at all time tights, maybe even off 2021. But I do think the risk-reward that you get, if you invest in some BSL profiles, like maybe some BSL AAA or middle market AAAs are interesting. And then down in mezz, some junior triple Bs I think are interesting. Some mezz profiles like in double B, single B, offer attractive yields, and I do also trade Europe. So I think there’s some interesting risk profiles, maybe double As look attractive right now. Lastly, I do think that CLO equity is getting more and more attractive given the liabilities are at their tights and the arbs improve quite a bit. So CLO equity is certainly going to be very relevant.
Shiloh: The arb is the natural profitability of the CLO?
Bilal: Correct. I think the payments on CLO equity are looking a lot better and we’re seeing a lot of interest and I do see a lot of interest for that part of the cap stack as we go into the new year as well.
Shiloh: Do you think equity will look all the more attractive in an environment where rates are coming down?
Bilal: So I think it will because we’re going into a benign credit environment, we’re looking to see, I think it’s the expectation that M & A activity will pick up, so there’ll be more opportunities to buy more loans for CLO managers, sort of like the workhorse of this little complex.
Shiloh: So one of the trades that we’ve I think partnered with together on was just the, I don’t want to use the word distressed, but the dinged up double B trade where maybe if you liquidated the CLO, theoretically, when we bought the double B, you would’ve been underwater, you couldn’t have liquidated all the loans and gotten back a hundred cents on the double B. How do you get comfortable owning securities where for example, the double B is often the junior-most debt tranche and the loan portfolio has seen a pickup in loan defaults. How do you get comfortable owning securities with that profile?
Bilal: I think there’s a couple of things to mention there. Obviously you have to do a lot of analysis of what the underlying risk to the double B is, what are the underlying loans that it is most sensitive to. But I think the other dynamic is the structure of what is at play. So these deals, as you know, they’re a lot more seasoned and they’re either very close to reinvestment period or out of reinvestment period. So there’s an element of what happens to these deals if there’s scheduled principal payments that come through and how is the CLO manager, what liberty do they have to reinvest into the deal?
Shiloh: So in that trade you bought a CLO double B at a discount to par, and you’re hoping that the manager isn’t going to buy more loans with the proceeds that come back as loans prepay. You want the CLO to delever, that’s the better outcome for the BB in that case.
Bilal: So effectively you would hope that the deal becomes static, but then you really have to get comfortable with the underlying credit. The deal that we’re talking about is more seasoned, there’s a lot of tail risks, so is really the race against the time, which is does the bond delever faster than the tail can get further stressed? So I think there’s that undercurrent.
Shiloh: So the tail being the worst performing loans that still remain in the CLO at that point? Bilal:
Correct. And what’s different about this trade versus when you buy maybe a double B that is from a relatively newer deal is it’s still going to take some time for the credit selection to play out in different years, but here the investor is buying and has a pretty good sense of what the outcome could look like, so it’s a differentiated risk profile. And then if the deal delevers faster than what is expected, then you could have your debt, especially double B, deep down mezz to be called and there’s a natural pull to par. So yeah, those are things to think about in that trade and for deals that they still have some runway in terms of their reinvestment period. Again, I think the contrast there is you have some clarity as to what makes up the portfolio of the deal versus maybe a newer deal that hasn’t really seen stresses that come along maybe a year like Covid or 2022 and those stresses just play out in your portfolio.
Shiloh: The way I think about the distressed double B trade is that an option you have if you sit in my seat is to buy, say primary equity, and in that for a new clean portfolio with a great manager, you might run a case where 2% of the loans default each year and you’re targeting returns of mid-teens. So that’s one option for you. The other option has been, and this really isn’t a trade we see a lot of today because the market’s rallied so much, but through 2023, a lot of times, instead of buying equity, you could buy a discounted double B and it’s going to be a dinged up portfolio and that’s why it trades at discount obviously. But in those cases you might run a 5% default rate and conclude that you’re still money good through the double B, and you might be able to get returns that are comparable to equity, or, in some cases, better than equity. Again modeled at a 2% default rate. So the double B comps really well to equity in markets where there’s some stress, which again I wouldn’t define as today.
Bilal: Look, I absolutely agree and I think what happens in the CLO market is it’s not a very continuous market in the sense that if you want to go buy a certain asset class rating in the secondary market, say you wanted to go buy CLO equity, it takes some time and effort to really find the profile. So a lot of CLO equity buyers were looking to pick up CLO equity in late 2022, early 2023, but there was just not much available for sale. We did see some of these dinged up double Bs come up for sale, and, to your point, they were trading at levels that could match equity-level returns. So I think that drew a lot of interest in them, plus the point about the default rate, you’re right, what we’ve seen even in GFC or in Covid and even now is just vector shocks in terms of default rate spikes as opposed to very high cumulative default rate till the end of the deals’ life cycles. I think that’s why some of these trades are interesting because these BBs, they’re money good, they may not see any kind of impairment.
Shiloh: So of the CLO universe out there, there’s maybe a hundred plus broadly syndicated managers who are active and 20 or so middle market managers. Do you see a lot of trading activity in the managers that are less well known, managers that are maybe competent but still building out their franchise, or do you stick to trades with some of the biggest CLO managers out there?
Bilal: We definitely look at newer CLO managers. It’s a combination, but I think it’s a growing complex. So there’s new entrants into the CLO world and we tend to be a little more manager- agnostic and really look at performance and I think we see that happening across the investors that they’re looking for maybe newer strategies that a manager could be undertaking. We’re seeing a lot of CLO PMs move from one shop to the other and what is being marketed is there’s a change in our investment strategy going forward in order to win more investors. And I think it certainly makes sense if you have a newer manager that has just raised an equity fund and looking to issue deals, let’s say three or four, I think they would love to get more investors onto their platform by offering them more conservative tools. So I think it’s definitely an
interesting play and then they could offer to give up some spread in return and make the investment more attractive. So we definitely see that happening and that’s a trade that I think is worth keeping an eye on. So we definitely traffic and I think we’re definitely one of the desks —
Shiloh: So wait, the newer manager trade, basically the trade off is you own a debt security and you get a spread premium, so you pick up something in terms of return, but if you’re not going to hold it to maturity, the liquidity of that manager is something you need to think about? If you were ever to want to sell the security, the price isn’t going to be comparable to a manager that’s more well known in the market.
Bilal: Yeah, definitely. I think liquidity is definitely the aspect there to keep in mind, but it’s also worth looking at, or understanding how did the CLO manager raise their equity fund if they’re promising some bigger returns. So they could be looking to invest in riskier portfolios to overcompensate for that. But then we see investors that have more insurance based pedigree that are entering the space, certainly know of a couple. What we’ve noticed is liquidity tends to improve as soon as there’s a few data points in terms of performance, and it’s also very data driven as soon as folks see the deal trading or the tranche is trading a little better there a sense of an understanding that develops this risk is trading akin to other similar in its cohort.
Shiloh: And then for middle market CLOs, which is important to me, is a little niche for us here at Flat Rock, how do you get comfortable trading middle market CLO securities where the underlying loans don’t have a daily traded price?
Bilal: So I think that’s the question that is in demand and I get the most often when I’m trading middle market CLOs. I think part of it is the structure of the middle market CLO I think is much stronger. I think that comes into discussion and then the fact that these deals are compensating you by giving you that extra spread over. Now it’s debatable in markets like these where you’re at the tights whether you are getting enough compensation in terms of spread pickup on each of the tranches. So there’s that, and then there’s nuances like what happens after the reinvestment period. So there’s a lot of investors that care about whether they’re going to get extended or whether their investment is going to see extension risk or not. But there is another element to the point that you made earlier about maybe taking a bet on a newer manager. So I started trading middle market CLOs before they were so cool, and I think there was a bent towards going with bigger platforms that can originate a lot of assets. So the main thing to think about there is whether that manager has access to enough assets to swap out maybe a stressed deal. So I think that is one of the things that people care about. It comes up in conversations and we’ve seen some investors getting to look under the hood by signing NDAs. So I think that’s another way that people have gotten comfortable.
Shiloh: Just signing a nondisclosure agreement will give you access to some loan level information?
Bilal: From a secondary perspective. You can also look at some key performance metrics of the deal. So even though you won’t have stats like MVOC or par creation to be as relevant because there’s no understanding of what that means within middle market CLOs, but you could look at how the triple C buckets are doing.
You can look at whether the equity returns are looking, how they’re looking. So there’s a few things that you could look at to ascertain the quality.
Shiloh: Bilal, is there anything else we should discuss that’s topical to you or your business today?
Bilal: I think one thing that we are seeing right now within the market is just the growth of the retail interests within CLOs. We’re seeing a lot of demand for As and triple Bs emerging, and I think what that has done to the secondary market, we’re seeing a lot of resilience even during bouts of volatility, we didn’t really see a lot of outflows from some of these CLO funds or the ETFs, so I think that’s very notable. I think for our business, we’re expecting to be active in the middle market complex, we’re an active participant on the secondary side, so I think we’re in an interesting space, an interesting time where we are seeing growth in the CLO market and more focus on the product internally, externally, and we’re positioning ourselves to be a relevant player within both BSL and middle market on the secondary side and on the origination side.
Shiloh: Great. Well, Bilal, thanks so much for coming on the podcast. Really enjoyed our conversation.
Bilal: Thank you very much for having me.
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 investment or potential investors in any Flat Rock Global Fund.
Definition Section
AUM refers to assets under management.
LMT or liability management transactions are an out of court modification of a company’s debt. Layering refers to placing additional debt with a priority above the first lien term loan.
The secured overnight financing rate, SOFR, is a broad measure of the cost of borrowing cash overnight, collateralized by treasury securities.
The global financial crisis, GFC, was a period of extreme stress in global financial markets and banking systems between mid 2007 and early 2009.
Credit ratings are opinions about credit risk for long-term issues or instruments. The ratings lie on a spectrum ranging from the highest credit quality on one end to default or junk on the other. A AAA is the highest credit quality. A C or D, depending on the agency issuing the rating, is the lowest or junk quality.
Leveraged loans are corporate loans to companies that are not rated investment grade.
Broadly syndicated loans (BSL) 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.
Spread is the percentage difference in current yields of various classes of fixed income securities versus treasury bonds or another benchmark bond measure.
A reset is a refinancing and extension of a CLO investment period. EBITDA is earnings before interest, taxes, depreciation, and amortization. An add back would attempt to adjust EBITDA for non-recurring items.
ETFs are exchange traded funds.
LIBOR, the London Interbank offer rate, was replaced by software on June 30th, 2024.
Delever means reducing the amount of debt financing.
High yield bonds are corporate borrowings rated below investment grade that are usually fixed rate and unsecured
Default refers to missing a contractual interest or principle payment.
Debt has contractual interest principle and interest payments, whereas equity represents ownership in a company.
Senior secured corporate loans are borrowings from a company that are backed by collateral. Junior debt ranks behind senior secured debt in its payment priority.
Collateral pool refers to the sum of collateral pledged to a lender to support its repayment. A non-call period refers to the time in which a debt instrument cannot be optionally repaid.
A floating rate investment has an interest rate that varies with an underlying floating rate index.
General Disclaimer Section
references to interest rate moves are based on Bloomberg data. Any mentions of specific companies are for reference purposes only and are not meant to describe the investment merit of or potential or actual portfolio changes related to securities of those companies unless otherwise noted.
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