Sean Griffin, CEO of the LSTA, joins The CLO Investor podcast to discuss regulatory wins that the LSTA has had and what key issues they are focused on today.
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TRANSCRIPT
Shiloh Bates:
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 in the CLO industry, and I interview key market players.
Today I’m speaking with Sean Griffin, the executive director of the LSTA, formerly known as the Loan Syndication and Trading Association. LSTA has been the leading advocate for the U.S. loan market since 1995, fostering cooperation and coordination among all loan market participants, facilitating just and equitable market principles, and inspiring the highest degree of confidence among investors in corporate loan assets. That’s according to their website. We talk about the regulatory wins they’ve had and what’s on the current docket.
If you’re enjoying the podcast, please remember to share, like and follow. And now my conversation with Sean Griffin.
Sean, thanks for coming on the podcast. Good to see you.
Sean Griffin:
Shiloh. Good to see you as well. Thank you for having me this afternoon.
Shiloh Bates:
How did you end up being the executive director of the LSTA?
Sean Griffin:
Well, we were formally known as the Loan Syndication and Trading Association. Just this past fall, we officially changed our name to the acronym. I come from a world of acronym, being a former CLO banker. So it made total sense that we converted just to an acronym ourselves. I’m a firm believer that in your personal life and in your career, you’re going to reach certain inflection points and you’ve really got to sit back, take stock of where you are, and think about things. And, I had been active with LSTA for a number of years, serving on a variety of committees that were all related to the CLO market where I could really leverage my expertise. And I got to know the organization, what it could do, what they could accomplish, and I really got to know the people that work here. It’s a tremendous group of people, really is a remarkable organization.
There’s only 15 staff members here and they do so much with so few people. We rely heavily on our membership for support, which it’s phenomenal to have, but the staff really puts in a lot of blood, sweat, and tears to make things happen. So when you’re presented with an opportunity to potentially become a leader of an organization that means so much to a market that’s so important to the broader corporate finance landscape, certainly the more I thought about it, the more difficult it became to pass up such an opportunity. I look at it as I know I can do structured finance, I know I can do deals for a long time. This is an opportunity that’s not going to come around again in my lifetime, and am I going to look back in five years time and really kick myself for not making a change? So after a lot of deliberation with my family and making sure we understood what this would mean, I made the leap and it’s been [a] phenomenal 18 months so far. We’ve done a lot so far and we’ve got a lot left to do, and I’m super energized and super happy.
Shiloh Bates:
So when we met, you were arranging CLOs for JP Morgan, I guess it was about a decade ago. Could you just walk us through your experience before joining the LSTA?
Sean Griffin:
Sure. I was a lifelong CLO banker. So, I joined JP Morgan fresh out of undergrad in 2001. Funny story there, I received my actual offer from JP Morgan. Around a month or two after the verbal offer was given, JP Morgan and Chase merged. So I get a call from HR and I get a little bit nervous. I’m a senior in college. Oh, what’s going to happen? Good news. You still have an offer. However, we don’t know who it’s from. We don’t know if it’s going to be from JP Morgan or Chase given the merger. I still have the original offer letter in a file folder at home. I keep it near my office desk. So anyhow, I joined JP Morgan summer of 2001. At that time you weren’t hired directly into a business line. You had to interview with different teams that had headcount needs. And I met with a couple of teams on the capital markets side. And one of which was a very small team and a niche product called CDO Structuring and Origination.
I hit it off really well with a number of the team members there, some folks that I’m actually still in touch with and they’re still around the industry today, which is pretty cool. And I was part of that same team through my entire 23 [year] career at JP Morgan rising up through the ranks [starting] as a lowly analyst.
Shiloh Bates:
And you were there through the GFC as well?
Sean Griffin:
Through the GFC. The team size changed quite considerably coming through GFC and I was one of the few members to come through all of that. I will say this – periods of volatility, when I give advice to folks in the market who are just starting the careers or a couple years in, make sure you take advantage of those periods of volatility when things are rough, it’s a great opportunity to actually learn. It’s really easy to get by without knowing as much as you think you do when things are going really well, when everyone can print transactions. When you have to take things apart, understand how things really function and what’s really driving and motivating people, that’s the learning opportunity and you’ve really got to take advantage and capture that.
So GFC was a great time for me to learn.
Shiloh Bates:
So, when you were a CLO banker, I think you had a reputation for having somewhat of a encyclopedic knowledge of CLO indentures and legalese. How did you develop that?
Sean Griffin:
It’s a great question. I have a reasonably good memory, and when I would read things, I could first and foremost generally remember where things would appear in a document. I remember where the priority of payments is. I remember where all my Article 9 redemption and refinancing provisions lie. So, that came pretty easy to me. What took a lot more blood, sweat, and tears was translating the words on a page into all the financial modeling that we were doing. Coming out of college, I was a math major but not skilled in Excel, so I had to learn a lot on the fly when I started. And I think that actually forced me to understand the documents even better because I had to take that from a piece of paper on my desk to an Excel model in a spreadsheet and do that over and over. Actually, some of the first deals I worked on were CDO squares. And the first task I was given was, here’s a stack of 45 offering documents, model all these deals for us. You learn pretty quickly.
Shiloh Bates:
Okay, that sounds like fun.
Sean Griffin:
It was. Looking back at the time, it was time well spent. I feel like my perspective that time was maybe a different one. It was probably a little bit of a painful, “Wow, this is a lot to be piled on top of an analyst”, but I learned a tremendous amount in doing so.
Shiloh Bates:
Now you’re at the LSTA and before we start talking about your current agenda and what you’re trying to accomplish, maybe we could just go back in time and just talk about some of the issues that the LSTA has advocated for and some wins that you guys have had. So, in my mind, the repeal of risk retention is to me a big win for the LSTA, but would you see that as the biggest?
Sean Griffin:
It was certainly incredibly impactful and I think I would put that in the top two or three category. So yeah, credit risk retention would’ve just greatly curtailed the formation of new CLO product. And we saw those impacts in 2017 and 2018. I actually remember being on the phone with a client when the final court ruling came through and the appeal had been won, which was phenomenal and just that did cause a lot of chaos. So that was one big victory and allowed the market to, a few years after that, get to north of $1 trillion in outstanding and issuance over the past couple of years has just been phenomenal. Just great to see how much the market has continued to evolve and mature and how we’re now taking that technology and seeing it applied across other related asset classes. And being used as a really great financing mechanism, really thinking about your private credit CLOs that we’re seeing more and more of these days. So that was one big win.
Shiloh Bates:
So then on that one, just to be clear, and maybe I should have set this up in advance, but risk retention was the rule that required CLO managers to invest in their own deals, either through a 5% strip of securities from AAA to equity or roughly half the equity. And so, you guys got that overturned, but that was only for broadly syndicated CLOs. So, private credit CLOs still have the risk retention as before, correct?
Sean Griffin:
That’s correct. And the reasoning’s pretty simple – in your broadly syndicated transactions, your CLO portfolio manager is not originating the loans themselves. They are essentially acquiring those loans from the street, whether it’s from the primary market or the secondary market. In most private credit CLO transactions, the CLO manager is also originating the bulk of the assets in the portfolio themselves. So they’re involved with all the loan negotiations and the like from inception, which puts it outside of the scope of the court victory that we had in risk retention.
Shiloh Bates:
So that was one of the big ones. What are the other wins that you guys have had?
Sean Griffin:
The next that I would say is the Kirschner case, which was a case that was brought about as a result of some litigation related to one particular loan, and it was questioning whether or not loans were securities. And, that I would say was existential for the loan market and loans retaining their identity. That was finally resolved,. I think everything, every last appeal and the like, formally resolved shortly after I started. So I’d like to think I echoed in this new era of loans because everything was finally done and dusted shortly after I joined in April of ’24. But those two events were just huge and they would’ve impacted the market in different ways, but both would’ve had material negative impacts on the market, had the decisions gone in other directions. So, I think we’re quite fortunate. We had a lot of support from membership. I will say sitting on the other side of things when the trade association for the market comes to you and says we are going to litigate against a regulator, that was a novel thing at the time, in the mid-20-teens. That was a very, very novel thing. It had not happened before. For better or for worse, it has become part of the panoply of things that we have as a means of pushing back against regulation that is overreaching, and we’ve seen it more and more over the past couple of years, but it’s something at the time was really unheard of.
Shiloh Bates:
What would’ve been the implication if a loan was a security, what would’ve been the implication for the market?
Sean Griffin
It would’ve been immediately very difficult for the investment banks because your bank’s proper have a difficult time holding below-investment-grade securities and these are all below-investment-grade loans. So, that was you have a banking issue. At the same time, in your CLO transactions, you have a limit on the amount of securities that you can own, you usually have a small high-yield bucket. And bleeding into that, there are many deals that didn’t have high yield buckets at all. So, you would actually have a portfolio of assets that wouldn’t be eligible. You wouldn’t necessarily be forced to sell those at that time. However, acquiring new instruments would’ve been very challenging on a go-forward basis and it could have had some knock on effects for banking institutions and other investors who invest in various parts of the CLO capital structure in terms of what they’re permitted to hold based upon their own internal investment criteria. So, there’s some pretty significant ripple effects that would’ve been quite stunting to the market.
Shiloh Bates:
Would it also have added more risk to the loan underwriting process in that if a loan is a security, then there is the risk that the end investors come back into the loan originator if they think that they didn’t act in good faith?
Sean Griffin:
When you move to a securities framework and you produce things like offering documents, there’s certain things that must occur and must appear in them. So yes, that introduces differentiator risk for sure.
Shiloh Bates:
Because I think I remember in that case, well it was like loan owners suing the bank that originated the loan and they were saying, yeah, you didn’t properly disclose information that I would’ve needed to make an informed decision or some risks. That was basically the case.
Sean Griffin:
Given where I was at the time, I wasn’t immediately focused on it and I wasn’t here for the bulk of the case. So I won’t comment on all the facts and circumstances other than to say, again, in my prior seat it was something where we were all concerned about where it could go, given what the implications were for how the market actually functioned on both the loan arranging side as well as the knock on effects for your securitization market.
Shiloh Bates:
So, if a loan, though is not a security, then there’s no insider trading rules or laws for loans. For stocks and bonds securities, yes, but for loans, it’s a wild, wild west in terms of who has information and what they can do with it.
Sean Griffin:
I wouldn’t describe it as the wild west though. I would say the lenders are more sophisticated. You don’t have, for example, like in equities where you can have individual ownership of equities, you don’t have that in the loan market. So it really is an institutional market. Participants can choose to be recipients of public or private information if there is anything that is public about the instrument. I do think we’ve seen a trend in loans more recently where things are skewing with more and more companies just being private overall. So there’s not as much public private information where you could potentially cross a wall.
Shiloh Bates:
Got it. And was there a third win that you guys are also proud of?
Sean Griffin:
I would say that LIBOR – SOFR transition was a win for the market because that was what folks were feeling like was going to be the Y2K event for lending because so many of the floating rate instruments out there were based upon LIBOR, and you had $1.5 trillion syndicated corporate lending market that needed to transition. You also had a $1 trillion CLO market that would need to transition as well, and you needed that to go as smoothly as possible. And, I was actively involved with LSTA at the time. Working with them and ARC to work through what the rules of the road were for transition, what the right replacement rate was going to be, and how that all came into being. And it was a lengthy process, lots of back and forth, and there was lots of evolution and thought along the way.
So, I look at that as something that could have been far more impactful. Would it have stopped the market from completely functioning? Absolutely not, but it could have slowed things down pretty considerably. Once the transition, once LIBOR secession occurred, what happened in reality was that things worked pretty smoothly. In my old seat, I remember sitting there in January and saying, okay, the market is trying to figure out how to price things. It’s not trying to figure out what’s the right pricing mechanism, just what’s the right basis now. And that took about two weeks for the market to figure it out. And then CLOs were issuing again. So it was really a non-event for the market, but it was based upon all the heavy lifting the organization did and working with membership and policy makers over the course of a multi-year period to get to a good spot for corporate lending and CLOs.
Shiloh Bates:
So, with that transition, we moved from LIBOR, which is an unsecured rate. It was actually a polling rate, so it wasn’t actually a rate where business was done, to SOFR, which is where banks finance themselves overnight on a secured basis. So the SOFR is lower than LIBOR. So, in this transition we needed to figure out a rate to add to SOFR so that it was comparable to the LIBOR rate. And, I guess in terms of how that played out, I think it was pretty smooth, but I do think that CLOs financing definitely did increase by 26.5 bips for sure. On the corporate side, there’s been a lot of demand for loans and I think some of the private equity firms that own these companies were able to negotiate part of that 26.5 basis points down some.
Sean Griffin:
I think with the adjustment and it was either 26 for three month or just north of 11 basis points for one month. That was intended for existing transactions that had the transition language to make it as close as possible to where LIBOR was. So, that was the mindset going in and that was based upon some historical data and analysis over, I think like a rolling five-year period. For new issue transactions though, that really was a capital markets execution, whether it be on the CLO side or the corporate lending side of things. So the market will actually ultimately determine what the right rate should be. It was going to be SOFR plus something, whether that additional adjustment was part of the credit margin, but that’s more for the market to determine and I believe that’s what ended up happening in a lot of cases.
Shiloh Bates:
So, those are three big wins for the trade group. And, what are you focused on today? What are the key issues?
Sean Griffin:
I’ve got a couple of key issues front and center on my mind. There’s a big focus for us right now on education. Fortunately, we’re not fighting any real existential fires right now from a regulatory perspective. We’re through many of those. The current administration is much more markets and business friendly. So we are in a better spot from that perspective, which allows us to turn more to education, which is fortunate because with the growth and proliferation of private credit, education really is necessary. Because unlike the syndicated lending market, when you start talking about private corporate credit, it’s much more challenging to aggregate information. And because of that, that education effort becomes that much more important and impactful as long as you can pull together good information. We’re fortunate as an organization because we have access to our members, we’ve had over 600 members, around 100 banks and around 225 buy-side firms, virtually all of them are involved in both syndicated lending and private corporate credit in some way, shape, or form.
So, we have access to a tremendous stockpile of information that we can use to help tell the right story around private corporate credit, rather than let others dictate what the story is based upon snippets of information and lots of assumptions. So, that’s one big focus for it. And it’s becoming increasingly important in light of the recent executive order from earlier this summer, which is mandating the access defined contribution plans to private assets, which includes private credit. We’re hugely supportive of that as long as it’s done in the right way, as long as the right guidelines are in place, but our education efforts are going to be a big part of that.
Shiloh Bates:
So when I joined the market, you guys were the trade advocacy group. I thought of you guys as just doing broadly syndicated loans, but as the private credit market’s grown, you represent both asset classes.
Sean Griffin:
I say we represent everything that is corporate lending and the related markets. So, that’s your syndicated market, that’s your private corporate credit, and that is also the related market like CLOs. CLO is probably the most important related market that we represent. When I think about syndicated lending and private credit, it really is two sides of the same coin. And if you speak with a capital markets banker these days, they’re likely presenting their borrower, clients coming in, with a range of options. One of them being a syndicated solution, one being a private credit solution, and if they’re able to issue high yield, a high yield solution. So they’re offered a sweep of solutions. And I look at our membership and I see again, based upon the buy side and the sell side folks that are part of our membership. Virtually to a firm, they are all involved in both parts of the market. So, it makes tremendous sense. And we’re talking about senior secured lending ultimately. So, there’s lots of similarities. And, I do think there’s a lot that private credit can learn from what we’ve learned from the syndicated market over the past 30 years. Keeping in mind that private credit when it started as middle market lending decades ago, these two things have been running side by side for a number of years. They really started to converge in the early-to-mid 2022 is when you really saw the convergence flare up.
Shiloh Bates:
Okay, so education is a big priority.
Sean Griffin:
Absolutely. Education’s a big priority. The other big priority for us is we look at the loan asset class, it still functions. It’s a very laborious and manual process to administer and trade and transfer loans. That is something that we are focused on in improving. Part of it is simple loan operations. How do we take loan settlement times, which right now are too long and bring them in? How do we improve that so the market trades more efficiently, allows for more liquidity? We want that to happen. That requires a very solid foundation in data and data that is accessible to all the market participants as close to contemporaneously as possible. That’s part of it. That data foundation, though, also sets us up for the next stage in the evolution of the loan market, which is if you look across other asset classes, whether it’s equities or debt securities, they’re going to be digitized and they’re going to be tokenized in some way, shape, or form.
And, we want loans to be able to take advantage of that same technology as well. That’s not an immediate thing. It doesn’t to be an immediate thing, but it’s something the market has to be positioned to be able to take advantage of because if commerce is heading in that direction, and we as a market haven’t evolved in the same way, at least to give us the same options that other asset classes have, then we’re going to be left behind and we should not be left behind as an asset class. There’s a tremendous value in corporate lending. And I personally, and we as an organization, want to make sure that we are as well positioned as possible. The focus on loan operations has been a decades long thing that we have been focused on and working to chip away at with the advancements in technology and things like AI, that adds a new component to it, and increases the focus that we must have as an industry overall to make improvements for the market.
Shiloh Bates:
So, if I buy a stock in my trading account, it’s a electronic purchase, and the settlement happens T+1, meaning trade date plus one day, so the settlement’s the next day. And for loans there’s a target settlement, so it’s T+5.
Sean Griffin:
Target would be T + five.
Shiloh Bates:
But, many times, it slips to – could be anything. Could be T+20. And that just depends on whether the buyer and the seller actually are in a position to close the loan. So, it can just get extended for quite a period of time. Is the end goal to have it be more like other asset classes, where the closing is a fixed date, and that’s it, and there’s penalties for not delivering the security or showing up with the cash?
Sean Griffin:
So, I would like to see more certainty around settlement. Does it always have to be a fixed date? No, because one of the beauties of the leveraged loan, the loan product, is some of the flexibility it has. And I believe borrowers like it because there is some additional degree of control they can influence over things like the lending group. So, that is an important feature and we know that’s something that folks won’t likely want to concede. We want to make sure there’s a degree of reasonableness built into all of this. However, that being said, for the bulk of loan trades in the market, we would like it to be as close to a consistent date as possible. And we think there are ways to getting to that and ways to demonstrate the value to that. But, we’ve got to, as a market, be able to collect the data that goes along with that trading velocity that can demonstrate the value that is actually there. So, does the whole market have to go to T+5? No, but a subset of the market should be at that level, and there will always be outliers. And that’s okay, because the product does have more flexibility than your traditional high-yield security or equity security.
Shiloh Bates :
Are those the two biggest things you guys are focused on?
Sean Griffin:
Those are the two biggest things that we’re focused on in terms of market impact currently. I would say the third prong that we’re focusing on is more our relationship with our membership and making sure that and doing what we can to engage and interface with them in a way that is most impactful to them. So, this is our organization’s, this is LSTA’s 30th anniversary this year. So, we’re super excited about that, and we’re doing a couple of neat things at our annual conference. It’s coming up in around a month, but we also did some work earlier this year, working with our marketing partners. We did a survey of membership to understand how they’re consuming all the content and information that we produce, and we learned some pretty remarkable things from that. And what we’re finding is there are probably better ways that we could be engaging with the broader market and that’s something that we’re spending a lot of time and effort on because we want to be as valuable of an organization to all of our members as we can be, and that takes time and effort and that’s causing us to think about doing some things differently, how we’re approaching things like conferences, multimedia, how we’re creating content, what sort of flexibility folks have in engaging with the data that we have, how we’re highlighting members because we’ve got the benefit.
I think the strongest part of our organization is our membership. We’ve got a tremendous membership group. We want to be able to highlight that more. So, we’re thinking about all those things. So, over the course of the coming months, we’ll be rolling some new things out, which I hope will have the end goal of ticking all those boxes and achieving those goals.
Shiloh Bates:
So, one of the market trends over the last two years has been LMEs. So these are liability management exercises, out of court, informal restructurings. Does the LSTA have any opinion about those, or is that outside? The LMEs have, in some cases, resulted in very low recoveries for lenders. Is that something that you guys have looked at or have an opinion on?
Sean Griffin:
So while we won’t comment on a particular credit or case, what I will say is that I don’t like to see the quality of credit get eroded in unnatural ways. So, that’s something that we’re focused on. I would also say that not all LMEs are bad ones. I think there are a number of good ones out there. I think those tend to be LMEs where all of the lender participants have an opportunity to participate in whatever the solution is, as opposed to favoring one group to the detriment of another. So, I think that latter case, where you have the haves and the have-nots, those are more challenging. I think those are the ones where you see people end up with worse outcomes over an extended period of time. And that’s something where I feel pretty strongly that’s not long-term good for the market overall. It might be short-term good economically for a subset, but longer term for the market, that trend is not a positive one. So that’s something that we certainly have a perspective on. But I would say my big point is not all the LMEs are bad ones, but when you do see something that is more challenging, and look, it raises a number of questions that then folks have to go back and they’ve got an answer to their LPs and their credit committee as to why certain things are happening and how could that happen based upon the type of loan that this is. So, those are all challenges for the market participants.
Shiloh Bates:
So, the idea there is that if you and I are both participating in the same loan and there’s a restructuring, we should end up with the same recovery. Whether or not you’re a bigger investor in general or in the loan, and I’m a smaller investor, it should be the same recovery. Unless you’re willing to put up additional capital, and I’m not. And then in that case, the recovery could be different.
Sean Griffin:
From my perspective, as long as everyone has the opportunity, if they don’t have the ability to participate, that’s something else. But, as long as they have the opportunity, that creates a degree of fairness across all participants, which I think we would like to see.
Shiloh Bates:
Was there a court case about this recently where the result was actually what we’re describing? That lenders should be treated equally?
Sean Griffin:
There have been a couple of cases. I don’t think it touched upon this point in particular because LMEs still do occur, so it’s not something that’s out of the market. I do think some of the recent cases from, if I’m thinking about the right ones, there were a couple that came out either just before the Christmas holiday last year or just ahead of the New Year’s holiday last year, that at least caused folks to think a bit more carefully about the steps they were taking.
Shiloh Bates:
And I think there’s a trend on two fronts. There’s a trend, some private equity firms have a do-not-buy list, where they have a syndicated loan and some firms are excluded from buying the loan. Usually, these are distress shops that might have, or be considered to have, sharp elbows in the past. Is that something that you guys have an interest in?
Sean Griffin:
We do because of the impact of secondary liquidity, and it does have a knock-on effect for market operations. I would say that we and our model credit agreement provisions, we do talk about DQ lists.,
Shiloh Bates:
DQ, so disqualifying?
Sean Griffin:
Disqualifying lender list. And we recognize why the borrower and or sponsor would like them and we recognize the value they have. So, we’re not saying they should not exist because there’s certainly things from a competitor standpoint where you wouldn’t want competitors getting into one of your transactions and getting private financial information because they are a lender. So, that makes a lot of sense to us, and we’re generally okay with that. I feel, though that if it’s taken to an extreme and you have too many lenders excluded, it becomes very difficult as a knock-on effect for secondary liquidity. It has some pretty nasty ripple effects on the operational side of things. So, those are critical to us. Because we do focus on the secondary liquidity of the market. Because there’s so much that even though CLOs are 65-70% of the institutional term loan B market, within loan mutual funds and ETFs, you have 8 or 9% of the market, and that’s a material number. And, if you unnaturally limit liquidity or transferability, it becomes potentially more problematic for those funds, and that would be a negative outcome for everybody.
Shiloh Bates:
And then another issue is, if you and I are again lenders to the same company, for example, we could form a group and we could agree ahead of time that in any restructuring, we’ll be in the same on a level playing field. What’s your opinion on those?
Sean Griffin:
I think it’s a response to some of the LME transactions that have happened. It’s something that we discuss with regularity with both buy-side and sell-side members. Quite honestly because there are pros and cons to it and depending upon the reason something is being put together, you very quickly see that forming its own have-group within the LME community. So, you have to be careful about it. And I certainly understand that the borrower and or sponsor will have some strong views as well, especially the earlier those are formed in a process. So it is a market defense mechanism that has been created in response to some of the LME behavior that the market has seen. Is it always good or always bad? No, the answer is somewhere in the middle. I would say it’s one of the more challenging things to navigate in the market because there’s so much that becomes very, very facts and circumstances dependent.
Shiloh Bates:
So, when a private equity firm is buying a company, can they go on the LSTA website and download a sample credit agreement and then fill in the specific terms that apply to them, like the price of the loan, and the spread, and the covenants, and the like, if there are covenants?
Sean Griffin:
If the market broadly took our model credit agreement provisions and implemented them, we wouldn’t be talking about a number of the things that we’re talking about today. So, I don’t believe that’s happening, which is okay, we have to provide the leadership and the guidance that we can, but I think what you see is each of your sponsors or owners will have the terms they’re looking for in a form they would like to see. Some of it, I’m sure, is pulled from our model credit agreement, but I would say that there are places where there’s going to be some deviation. But, ultimately this comes back to this being a capital markets exercise and transaction. So, it’s ultimately, you have a seller and you have buyers in the market, and they have to mutually agree upon terms when it comes to that transaction. I think that’s why you’ve seen credit agreement provisions migrate over time. Certainly in more robust markets where it’s a more issuer friendly market or borrower friendly market, terms tend to favor the borrower more, but as you have a turn in the cycle and it becomes much more lender friendly, lenders do have an ability to take some of that back though I would say things have been skewing more towards the borrower over the past couple of years, but it’s been a friendly environment.
Shiloh Bates:
So, you guys have your big conference coming up. If somebody comes to the conference, what should they expect to learn?
Sean Griffin:
Hopefully a lot about corporate lending. Every year, we host our annual conference, and we like to cover a couple of key topics. So, we’ll cover the syndicated lending market, we’ll cover the private corporate credit market. This year, I’m actually moderating a panel of private equity sponsors, which I’m super excited about. I don’t think we’ve done that before. Everyone is very focused on, when will we see the M&A and LBO machine pick back up? It’s been a rolling, it’s six months out, it’s six months out now. I think the past two or three years. And look, when you go back to those points in time, I think everyone at the time they’re making those statements, it was 100% justified. And facts and circumstances change and that caused that launch point to get pushed a little bit further out, a little bit further out. Again, we can see that the catalyst for a very robust market next year, but there’s also risk to it.
So, we have to just bear that in mind. So we’re talking about our sponsor panel. We have a number of breakout sessions in the afternoon. This year, we’ve got one that is non-corporate credit financing related, which is pretty exciting, just given how the market’s evolving and how our members continue to evolve. We felt that would be an interesting panel to improve. But you can learn about trading trends in the market. You can learn about legal trends in the market, operations trends in the market. And each year we also try to include outside-of-the-market keynote speakers, which are pretty exciting. So we have the chief global economist from Citigroup this year joining us and we also have folks coming in and that’s Nathan Sheets. We have Patrick McGee who’s a reporter for the Financial Times coming in to speak to us about Apple in China, which I think will be incredibly interesting.
And then, we have Connor Grennan, who is the Chief AI Architect at NYU Stern coming in to talk about AI and the impacts that could have on life, the market, all the things that we do. So, it’s pretty exciting when we try to veer away from traditional finance when we have our external speakers come in because it is something that is topical and interesting and not something you might get elsewhere. And, we’ve got a lot of senior folks that attend the conference, so it’s a good treat for them.
Shiloh Bates:
I also saw you guys are starting to launch a podcast.
Sean Griffin:
We have started launching a podcast, The Credit Continuum. Andrew Berlin, our director of policy research, has been championing that. We’ve got a couple of episodes under our belt at this point. It’s been a lot of fun so far. I think he’s done a great job. It’s a great way to get different perspectives and it’s a great way for us to highlight some of our members as well. And there’s so many folks in the market who [have] this deep knowledge and expertise. And the fact that we’re able to tap into that and get some of that knowledge out there is pretty phenomenal. So, we’ve really enjoyed doing those, and we’re looking forward to having that continue into next year and beyond.
Shiloh Bates:
Is there anything topical happening in loans or CLOs that we haven’t covered?
Sean Griffin:
Other than the questions around when does the M&A and LBO and sponsor machine start up again? That’s a critical one. These are the things that I’m thinking about, and I also think about how is issuance going to feel next year on the CLO side of things? A couple of robust years in a row, or what happens when there’s not as many refis and resets to do? How does the new issue machine feel? Is there any recalibration going on in the equity side? And, how does the private credit CLO market continue to evolve? Right now, it’s been a financing tool, but at some point you could see it, again, I don’t think across the board, but in some cases moving away from financing and more along third-party as you have more and more diverse groups of capital coming into the space.
Shiloh Bates:
Great. Sean, my closing question is always, what’s a CLO in 30 seconds?
Sean Griffin:
This is a great one. Alright, I haven’t timed myself, so we’ll see how I do here. So, a CLO can be thought of as a finance company, whose sole purpose is to acquire a portfolio of financial assets, in this case, corporate loans. It’s going to finance the purchase of those assets by issuing debt and equity to various investors. That debt is typically sliced into layers, called tranches, and each of them, including the equity, has a different risk-reward profile. In other words, the riskier the tranche, the higher the potential return, while the least risky tranches have the lowest potential return. That portfolio of assets is selected and managed by a portfolio manager, who will be a registered investment advisor, and have control over all the material decisions related to that portfolio. The portfolio manager is going to operate within a set of rules governed by the transactions’ legal documentation, which includes things like portfolio diversification, credit quality, and tenure requirements on the assets themselves. And it describes how those tranches that I just talked about are actually paid. You’ve got an investment bank that’s typically hired to structure the deal and to place the tranches with investors, and you typically have rating agencies involved who are going to rate the debt portion of that CLO transaction. I think that’s 30 seconds.
Shiloh Bates:
That was great. Sean, thanks so much for coming on the podcast, really appreciate it.
Sean Griffin:
Shiloh, this was awesome. It was great to see you again. Really appreciate the opportunity. Looking forward to hearing the final product.
Shiloh Bates:
Sounds great. Thanks again, Sean.
*******
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:
– 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 the 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 in 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 a D, depending on the agency, the rating is the lowest or junk quality.
– 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 among market participants.
– Middle market loans are usually underwritten by several lenders, with the intention of holding the instrument 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.
– LIBOR, the London Interbank Offer Rate, was replaced by SOFR 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 principal payment.
– Debt has contractual interest, principal 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 the underlying floating rate index.
– RMBS, our residential mortgage-backed securities.
– Loan to value is a ratio that compares the loan amount to the enterprise value of a company.
– GLG is a firm that sets up calls between investors and industry experts.
– Payment In Kind, or PIK, refers to a type of loan or financial instrument where interest or dividends are paid in a form other than cash, such as additional debt or equity, rather than in cash
– A covenant refers to a legally binding promise, or lender protection, written into a loan agreement.
– Net Asset Value (NAV) – The value of a fund’s assets minus its liabilities, typically used to determine the per-share value of an interval fund or investment vehicle.
– Dividend Recapitalization (Dividend Recap) – A refinancing strategy where a company borrows to pay a dividend to its shareholders, often used by private equity sponsors.
– Continuation Vehicle – A fund structure that allows investors to roll their interest in an existing portfolio company into a new vehicle, while offering liquidity to those who want to exit.
– Equity Cure – A provision that allows private equity sponsors to inject equity into a company to fix a financial covenant breach.
Risks:
– CLOs are subject to market fluctuations. Every investment has specific risks, which can significantly increase under unusual market conditions.
– The structure and guidelines of CLOs can vary deal to deal, so factors such as leverage, portfolio testing, callability, and subordination can all influence risks associated with a particular deal.
– Third-party risk is counterparties involved: the manager, trustees, custodians, lawyers, accountants and rating agencies.
– There may be limited liquidity in the secondary market.
– CLOs have average lives that are typically shorter than the stated maturity. Tranches can be called early after the non-call period has lapsed.
General disclaimer section:
Flat Rock may invest in CLOs managed by podcast guests. However, the views expressed in this podcast are those of the guest and do not necessarily reflect the views of Flat Rock or its affiliates. Any return projections discussed by podcast guests do not reflect Flat Rock’s views or expectations. This is not a recommendation for any action and all listeners should consider these projections as hypothetical and subject to significant risks.
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 merits of, or potential or actual portfolio changes related to securities of those companies, unless otherwise noted. All discussions are based on U.S. markets and U.S. 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 adviser or give advice in a fiduciary capacity. Additional information about this podcast, along with an edited transcript, may be obtained by visiting flatrockglobal.com.