Collateralized Loan Obligations (CLOs) and Tariffs

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 in the CLO industry, and I interview key market players. Today I’m speaking with Himani Trivedi, Head of Structured Credit at Nuveen. She’s responsible for managing loans and investments in structured credit across Nuveen managed CLOs and various other fixed income strategies. We discussed the effects of tariffs on the loan market, CLO equity projected returns and new funds being launched on the Nuveen platform. We recorded this episode on May 4th, at a time when the loan market and CLOs had partially recovered from Liberation Day.

In the interest of full disclosure, my firm invests in CLOs Himani manages. And if you would like to listen to a podcast where I’m the one answering the CLO questions, check out the Animal Spirits podcast from last week.

If you’re enjoying the podcast, please remember to share, like and follow. And now my conversation with Himani Trivedi.

Shiloh:

Himani. Thanks for coming to the podcast.

Himani:

Thank you for having me. It’s a pleasure.

Shiloh:

So, Himani, why don’t we start off with your background and how you ended up being a CLO manager?

Himani:

Yeah. For sure. So, I started in the CLO market back in 2004. So, it’s been about 21 years working in this market. I really started at the firm that I am at in the CLO business. So, I work for Nuveen and I head Structured Credit. We started with almost zero exposure to CLOs both in management or investment capacity and back in 2004, we started seeing a potential for this type of structure overlaying broadly syndicated loans and brought that structure to the market. It’s non-mark to market, it has a long-term view that a manager can take and so, we grew over the period of time. And currently we manage 43 billion assets under management within leveraged finance. And about 21 billion of that is in CLOs both in managed CLOs under Symphony series and about 4 billion in investment in CLO tranches up and down the capital structure.

Shiloh:

Okay. And so, are you using the Symphony brand name today or are you issuing CLOs under Nuveen?

Himani:

That’s a good question. So, we started off with the Symphony brand as we were a standalone owned by Symphony for the longest time. The standalone was called Symphony Asset Management, and in 2020 we merged with the entities. So, we are continuing with the Symphony brand, Symphony CLO series. However, our funds are issued under Nuveen brand. So, our captive fund that invests in Symphony CLO’s Equity or Closed ETF is in the Nuveen brand. Our interval fund that is offered to registered funds is also Nuveen branded. So, we’re using the best of both worlds because our CLO investors in the tranches have known as under the Symphony series. And our fund investors know us both from the retail, institutional side, under the Nuveen brand.

Shiloh:

And so, in CLO management, how do you guys see yourself as differentiated from peers?

Himani:

So, within our portfolio, there’s a few things taking a step back when we think about CLO management, there are a few different components. I always say it’s multi-dimensional asset management. The reason is you have a pool of portfolios, and a diverse portfolio of loans. So underlying loans within different industries, it’s pretty diversified set of industries. And so, you need analysts who are following these companies on a regular basis. So, we have a pool of analysts of 20+ analysts who are constantly looking at credits within their sectors and subsectors. But the differentiating part there for us is we focus on broadly syndicated liquid loans. So, most of our portfolio has at least 7+ bid depth, which means that seven different arrangers or dealers are making markets in the secondary market. That allows our analysts to think about relative value and act on it. For example, when you underwrite the loan, there is an asset selection. You do a lot of work upfront, but then over a period of time, these loans are seven-year maturity. And over a period of time the companies evolve. Things change; markets change. We could have been wrong in making an assessment upfront. In these situations, we want to be able to sell out of a loan and buy something else that we think has a better opportunity to get paid back at par, because all we are looking for is getting back par for loan asset class. The risk is very asymmetrical. You cannot get much more than par on loans, but your downside is obviously zero. So, what we focus on is trying to assess relative value pretty much on a daily basis as news evolves and reposition the portfolios on a single name basis or on an industry rotation basis. But again, going back to the liquidity of the portfolio allows us to do that. If you think about the broadly syndicated loan market at large. Not all loans are liquid. There would be about 30 to 40% of the market, this is the less liquid broadly syndicated loans because they’re smaller in size. They’re newer. They’ll probably graduate from the middle market into the BSL side. So that’s one big differentiator for us in terms of risk management through rotation portfolio trading within our asset side. And then the other part is structure and technology. So, my background is financial engineering. I have in my team five other computational finance folks within my team. So, we build systems on the platform by ourselves that allow us to manage very quickly many of these movements that we want to make in the portfolio. But over and above that, the structure side of it is a big part of the equation. We have a lot of following. We have a lot of investors up and down the capital structure but also making sure that when you are making portfolio related decisions. What impact could be on the structural nuances for the CLOs. So, a combination of all these things, I feel we are very well set. Both from management and investment side. It’s a one big team. We don’t have silos for CLO investing and CLO management, so all that together helps us manage all types of strategies within the CLO asset class.

Shiloh:

I think one of the maybe reputations you guys have in broadly syndicated CLOs is that very good manager on the one hand. But I think you guys also just print less deals than other folks. And so not sure if that’s still true today, but historically, I’ve seen that as you guys having a good track record and being more selective because there’s a limit to how many CLOs you can do in a year and still be selective as you want.

Himani:

So, before 2020, we did not have what we call a captive fund, where essentially captive fund is a fund that allows you to approach the market to create CLOs and become the sponsor equity for those CLOs, as in when the opportunity arises. When we didn’t have that fund, we were relying on third party investors to invest in our CLO equity. However, since we have had funds, we had a great foundation. By the way, like I said earlier, we invest in more liquid, broadly syndicated loans, which means we can buy a portfolio very quickly in the secondary market as well. When we created the issuance fund, as I call it, and the captive fund that allowed us to come to market more often when the opportunity arises. To give you an example, before 2020, we generally would do 1 to 2 deals a year. Since 2020. Our run rate has been anywhere from 4 to 8 deals per year. New issue deals. And the way we think about approaching the market is the optionality that could lead us to 15+ percent IRR. That’s our base expectation. We did issue, for example, seven new CLOs in 2022 when the loan market traded off. That allowed us to go into the market, provide liquidity, create the CLOs because we already have a fund that could invest in these funds at equity and buying assets at discounts in CLOs is very powerful. So long winded way of saying we are more focused on finding opportunities and when there is an opportunity, we are able to go with many more deals than 1 to 2 deals a year because of the liquid nature, the way we are set up, the broad base and foundation that we have to be able to build on it. So, since 2020, we have had 8 billion CLOs under management and now we are almost 18 billion over the last few years.

Shiloh:

So then, would it be true to say that some other managers might prefer to open warehouses and have them buying loans for half a year or longer? And I guess at your shop, when you see the opportunity in the market and when loans are trading at a discount, like you said, you skip a lot of the warehousing and just try to get straight into the CLO. Is that correct?

Himani:

Yes, partially. What I mean by that is we do have long-term warehouses, but we don’t use a much larger part of those warehouses. The rationale behind it is when you have a benign market or there are really good opportunities that are coming through the new issue loan market, especially when we are so selective. The rejection rate is about 70% on an average. And in some cases, it’s like in 2021, a rejection rate was 85%. So, when we are rejecting so many loans, then when we like something, we do want to house that loan into a warehouse for future CLOs. But we limit the exposure to such buckets, meaning we will have 20 to 30% of the portfolio ramped up through the warehouse. And then when time is right, where your asset pricing and liability pricing sync up, and there is enough optionality on both sides that can allow you to generate 15+ percent, that’s when we go and print a CLO and buy assets from the secondary market. One good example is most recently literally right before Liberation Day, we had a deal in the market. We had most of the CLO tranches spoken for. We went subject on the CLO.

Shiloh:

“Subject” means all the CLO’s financing tranches have been agreed to. There’s demand for the total financing.

Himani:

That’s right. Pricing and the structure are all agreed upon.

Shiloh:

I’ve never understood why “subject” was the word there.

Himani:

We have just been using the terminology forever, I guess. But that was the idea is you locked in the pricing. But on the asset side, we ramped up only 25% of our portfolio, and the thought was we had no idea that we would have such a big change coming to the market in terms of tariffs. But we did expect some volatility and we wanted to buy assets a bit cheaper post that announcement and now going into that, it was a great time to be able to buy high quality assets at much deeper discounts and now you’re created a CLO where you have the financing cost from pre Liberation Day, the market started widening out both on assets and liabilities but we were able to buy assets from the secondary market.

Shiloh:

So, tariffs are the most important thing happening in our market today. And I guess other markets prior to Liberation Day tariff risk was up. Were you guys trading around your portfolio or is it more that for first lien senior secured loans tariff risk is maybe a risk more pronounced for the private equity owners of these businesses. How did you see it pre Liberation Day?

Himani:

So, we had started thinking about tariffs. I would say late last year, because that was one of the narratives from the new administration that was coming on board. So, what we did was we combed through our portfolio through various types of industries and tried to understand by talking to the issuers where the risk lies. And by the way, it was not just tariffs. There were a few other different agenda items that we were really focused on. How some of these potential changes in policies could affect the market, what are the risks, whether that could translate into inflation, if inflation increases which industries could get affected at this point in time, and so on and so forth. So, we had a few different risks identified, but also it was interesting the loan market had tightened a lot over the last call it 9 to 12 months going into January of this year. The risk premium was very compressed. So, it made a lot of sense from our perspective to stay on higher quality. So before coming into Liberation Day, we had tried to move our portfolio a bit more on the higher quality side, just so that we can be a bit opportunistic as we roll into the year, which was expected to have some more volatility. Now the underlying portfolio is generally very diversified. So regardless of the outcome, you generally in a loan portfolio tend to have lower exposure to major losses because you’re in a senior secured. So, to answer your question, whether it was supposed to or is it going to be a big issue for loan market, I think it is going to be a bit more skewed towards certain industries, but overall, the loan market still is able to absorb these types of shocks.

Shiloh:

So, what industries do you see as the most exposed is it Chemicals and Retail and Autos? Or actually maybe not Autos now or how do you see it?

Himani:

It changes day by day, I guess. But I will say what we did was on April 3^rd or 4^th, we sat down, took a step back, and we created a framework because think about we have 400+ names in our portfolios and try to assess and overlay the information that we get as the information flows through. We needed to have a framework of which industries, and hence which companies could get affected. So, think about a four-quadrant approach. The x-axis is companies that are exposed to discretionary consumer investments, consumer spending versus non-discretionary. So, to give you an example, if we think about what falls in that zip code, a discretionary would-be arts and crafts or clothing, sporting goods, home decor. Those are more of the discretionary items when consumers are going and spending out. But then there are some non-discretionary essentials that are, no matter what, are going to be needed. That would include healthcare, medical products, utilities, food, staples, aerospace. Some of these were more non-discretionary, so we created based off of this x-axis. We’ve laid out all the different industries that were tariff affected on that line. And then y-axis, it was vulnerability of this industry or the company. So, we wanted to plot our companies within these four quadrants. And the vulnerability, the considerations were, is the company going to have the ability/has any vertical integration within their operations? Is their speed of reshuffling onshore-offshore, sales and manufacturing geography, onshore capacity? Those were more related to dealing with tariffs. And then there was the other part, which was okay, do they have pricing power, loyalty from consumers? What are their current inventory levels? So, the very micro information on an issuer basis. And then the third was in the leveraged finance space in particular. Leverage is a big part of the equation. So how does the balance sheet look? Where is the liquidity? How much leverage does this company have? So, all those are considerations to plot them in terms of vulnerability. So, with the analyst an army of 20+ people that we have, we all came together and tried to sort out our exposure, our investments in these companies and plot them into different quadrants. And then what we found is to think about quadrant one being low discretionary and higher vulnerability. So, quadrant four was the least highest essentials, meaning lowest discretionary exposure and lowest vulnerability. So, you wanted to be in quadrant four and you do not want to be in quadrant two. So, we started moving out of quadrant two into quadrant four because the market was already trading off, and you had those opportunities to be able to trade and rotate your portfolio for minimizing the risk.

Shiloh:

Have you spoken to any loan issuers where you think tariffs are an immediate, severe problem for their business model and liquidity?

Himani:

Yeah, we have been speaking with most of our issuers, especially those who have a supply chain. The answer is yes, we are talking to them, but their answer is also evolving because there is a lot of confusion around how to approach this from a longer term, because we are still on a 90 day pause and things have not been clarified or laid out very clearly. So, the issuers, at this point in time, depending upon what type of exposure that they have, they are a bit more on a holding pattern.

Having said that, they are absolutely in this short, uncertain time frame, trying to do the best they can by rotating from their exposure or supply, coming from China and from other countries. To think about it, the good thing to some extent is we’ve seen this movie before where especially some of the tariff exposed companies, retailers, they had already made some diversification of their supply over the last few years. So that’s coming in handy. But I think the question around tariffs outside of China is still a question mark as to where it ends up. And so not having that clarity does not give them a very strong conviction in terms of how to address it longer term. Do they need to find a solution onshore or can they reroute it to other countries offshore? Those are some undetermined unknowns that they are dealing with. Having said that, coming into this year there was an expectation for tariff changes. So, I think they were somewhat prepared to manage, especially the ones which were directly going to get affected. The ones that are a bit more taken by surprise are the effect that tariff announcements have had on the potential for the economy towards the latter part of the year, the slowdown that we are talking about. So non-tariff industries are also getting worried about what that outlook looks like and how they should invest or keep their liquidity or continue to grow or not. That uncertainty is still affecting that I call the second order effect that we are exposed to.

Shiloh:

In your portfolios or in the loan market in general? Is there some stat around what percentage of loans? Most loans are down since Liberation Day, so I don’t know. Two and a half points or something is the index. But what’s the part of that that’s loans that are down five points or more that people are really concerned about.

Himani:

So, the immediate answer after the Liberation Day announcement was the percentage was much bigger. Call it 4 to 5 points, maybe 20% right out of the gate. However, with the rollback or a pause, the market has been able to get a bit more constructive on a relative basis. And so that percentage has reduced dramatically. I would say probably 50% of those call it 10% or so, have been down 4 to 5 points across industries. They do move around a bit because we also came into the earnings cycle. And as and when you hear from the issuers, they tend to get more comfort. The investors tend to get more comfort, and you see that number move around a bit. But that was the exposure that repriced the market based off of the unknown and the risk relating to tariffs.

Shiloh:

So, you mentioned your loans, the loans that you guys’ favor are more liquid. So, you’re playing in the broadly syndicated loans. But even within that, loans that are traded more often. Is this for you guys like 2022 where you see cheaper loans and you look to create a lot of CLOs here, or is it still a time for caution?

Himani:

Yeah, we’re still very cautious. One of the reasons is that it’s a little bit of a double-edged sword, meaning because of tariffs, the cost side of the equation is going to go higher for the companies and hence the potential for increase in inflation. Inflation could be a short-term thing. It could be transitory the way it has been laid out. But the reality is that it is going to eat away from discretionary spending from consumers. On the other side is the potential for recession. As I said earlier, there’s a lot of uncertainty in terms of where this market could go. And issuers taking a cautious view is going to further slow down the economy. I believe that is a given. So, with those two aspects, we are taking a cautious view. Having said that, everybody else is also feeling the same way and are negative, which allows for opportunities at different points in time. And that is why our strategy of going to the market, when we see there is optionality that we can hit and be able to take advantage of the market works really well in this type of market, because there will be times when there is going to be a drawdown in the market, and in that situation, everything takes off the good, bad, ugly. And that’s when you want to pick up the good at a much better price. So, we have a list running, we have a list of companies that we are comfortable with in the long run. And if we do get a better entry point, we would like to go ahead and purchase those assets. I will say that the better-quality assets in general have been well bid for in the loan market or even after Liberation Day, as the market has been evolving or coming up over the last few days. We are seeing some stability on the better quality loan asset side. The unknowns are still in what I call a zombie zone, where we don’t really know which way it could go, but some of the better quality, stable long-term assets or companies that investors have faith in. We do see a strong bid for those types of assets.

Shiloh:

The S&P has really rallied quite a bit back from Liberation Day, whereas CLO equity is still down. Do you have any perspective on why those should be different?

Himani:

Unfortunately, our CLO equity valuations are not necessarily, in my opinion, the best representation of what the underlying risk is. Typically, what I see is CLO equity gets priced based off of market value of the underlying portfolio. And then you add on certain percentage based off what the cash flows are going to look like over the next one year. So, every time we have a loan price move, you tend to see the price of the CLO equity go lower when the loan goes lower and vice versa. However, in my opinion, it then makes it a better entry point if you are trying to invest in it, because now you are buying a loan portfolio which is not necessarily defaulting. Yes, there is re-pricing, but you’re really buying that loan portfolio at a cheaper price. And if anything, your distributions are going to be higher because of volatility. Your financing cost has already been set for all the secondary equity out there. So, you would actually have a better financing cost on that CLO equity. Plus, you’re going to get higher distributions.

So overall eventual return of that zero equity is going to be very different from the way it is priced today. And I’ll give you an example. Back in 2008, 2009 or even in 2020, because of the way CLO equity prices in the secondary market they had traded down in the teens/20s. And when the market recovers, they all recover because of the same reason that I just laid out. But eventually, even for that equity that traded down in the teens, you ended up having 20 to 25% IRR because it’s non-market to market underlying, longer term view, managers ability to actively manage the portfolio and distributions that you continue to get even during volatile times. So that is something really interesting for most CLO equity investors versus many of these other asset classes that even in volatile times like 22, 23, 25, you are continuing to get 15, 18% cash flows per year.

Shiloh:

Wouldn’t you say, though, one of the maybe market challenges is that because so much money has been raised, when you hit recessionary periods, you have the self-healing mechanism. The CLO can buy discounted loans and that’s great. Loans are always prepaying at par, but the magnitude of loan discounts in a market where just lots of capital has been raised. You pointed to the pre GFC CLO equity IRRs. But that was a time when the loan index traded into the 60s. It’s kind of hard to imagine that happening again. But on the other hand, I don’t think our investors are asking us for 30% IRRs either.

Himani:

That’s why I don’t expect CLO equity IRRs to be in the 20% base case. Because to your point, pre-crisis was somewhat a once in a lifetime because you had very high leverage, you had 75% to the AAAs at that time, and now we have 65%. So, the structures by themselves are less levered. So, by construction you’re going to get less return. And the financing cost was much tighter than what we have today. Of course, the assets were also tighter, by the way versus what we have today. But net net, the arbitrage was a bit wider and more levered at that time versus where we are. So, in my opinion, a good performing base case IRR to CLO equity could be anywhere from 14 to 16% is a range. You’re not going to see huge movements. Now, huge movements would come in only when there is a significant drawdown on the asset side. So to your point, if you are able to buy assets at low 90s, that in itself creates so much intrinsic leverage and also value that will get paid out at par and on a ten times level basis, anything that bought at 92 and getting paid at par is 80% returned right away. So that’s the type of entry point that could give you these outsized returns. But generally speaking, you have a mid-teens type of range if done well. And the reality is that many investors like that in alternative space, when you are investing into private equity or even private credit, CLO equity is a nice cash flow mechanics, very liquid underlying portfolio, see through transparency in terms of what the risks are and so that becomes a nice complimentary investment for many of these investors.

Shiloh:

In the 14 to 16% returns or projected returns number. I mean, with that include potentially refinancing the deal or extending its life in the future, or is that 14 to 16 over its total life or that’s the initial projected return, excluding those potential upside events?

Himani:

Yes, that’s excluding potential upside returns when you run the cash flows on day zero. Now, there will be times if you’re buying assets at 95 at a discount, your financing cost at that time is going to be wider. So eventually at some point in time when the market stabilizes, those loans should trade closer to par. And that’s when the financing cost will go lower, and that will be an extra return that you could get over and above the base case mid-teens. So suddenly your cash flows will start increasing when you refinance, the liabilities and your assets have also been traded up and that has given you this extra return. So those are again the upside scenarios that could lead us into 20+ percent. But to answer your question, base case, just as is when you create a CLO is what you’re looking for.

Shiloh:

So, two years ago, you and I were on a panel at Credit Flux in London, and I think we debated this a little bit back and forth. But you guys have a captive equity fund, so it’s investing in only your deals. What’s the advantage for an investor of doing it that way versus investing with somebody who’s doing lots of different deals with different managers out there?

Himani:

I have had the exposure to managing it both ways. And so, one of the reasons we did create this fund was to take advantage of what the manager can essentially bring to the table when they are also the equity. So some of the things that one should think about is when the manager is looking at the loan market, the high yield market, talking to the issuers, thinking about forward looking macro effects going down to the loan level, issuer level, the opportunity of going into the market on a real time basis is, in my opinion, a really strong benefit for the manager to be able to go ahead and buy assets when the time is right, or create this CLO when the time is right. In my mind, one of the biggest advantages is the ability to hit the market as soon as possible. When we have third party investors, and if you were relying on somebody who is going to be a majority sponsor equity, they are going to need to review a lot of different runs because they are not necessarily in the weeds of the market on a real time basis. The flow of information exists, but it takes a little bit of a lag. So, I think that it is the benefit that the manager gets to be able to come to the market with an issuance very quickly.

The second part is the control piece, which is as in when market opportunities arise. If you are really looking for a total return, the control piece is super important because at different points in time, you could refinance the liabilities to get the extra cash flow running down to the residual equity. You could reset the CLO by extending the life of this deal. And by the way, the reset helps many times increase optionality in the CLO because you’re extending the reinvestment period for very minimal cost versus going out and issuing the new CLO in the primary market. So, there are some advantages to reset. And then the third thing is calling the deal. Calling the deal at the right time. We’ve had multiple times in the past few years when it was a good time to call the deal, and you want to have as manager, if you’re managing, you can hit the button to be able to call the deal if you are control equity. So, I think these are the advantages that the fund investor gets. We have a captive fund, and the captive fund investors get by being alongside the manager. And by the way, in our case, for example, our parent company, our employees are also invested in the fund. So, there’s an alignment of interest that comes in as well together running as a franchise and also creating total return from a long-term perspective.

Shiloh:

So, for somebody allocating to your captive CLO equity fund, where do you think that capital is coming from? What’s it in lieu of that’s out there?

Himani:

First of all, I think the accessibility of this type of funds is much better and much more informed now than it has been over many years. And one of the reasons this captive fund concept even came in was because of U.S. risk retention that came in back in 2016, 2017. But coming out of Covid, I think a lot of investors appreciated the fact that even in volatile environments, CLOs perform and have been able to outperform many other credit markets. So, I think that knowledge and education has seeped through multiple different types of investors. So, in our funds we have pensions. These are investors, institutional investors who have been in this market for quite some time now. They have had some exposure in different capacities, sometimes in the form of a sleeve, maybe not a dedicated fund, but they did have exposure to CLO. So that is one component or constituents of our investor base on funds. But I think the more interesting ones who have been able to absorb the nuances of CLOs over the last few years are family offices, RIA’s. These are investors who are looking for alternative total return types of strategies, and CLO equity funds fit right in there where they’re not necessarily looking for liquidity at all times, but all they are looking for is a long-term total return. These are investors who invest in VC funds or private equity funds and CLO equity offers a similar return. But it gives these cash flows every quarter. So that has been the other investor base. And then some insurance companies, reinsurance companies, those are the other type of investors that would come in and participate and of course our parent company. So that’s the broad base of the type of investors we have. And one more thing on the investor base, it’s not just the US. So that’s the other thing. What we’re noticing is a lot more non-U.S. investors out of Europe, Nordics, Asia, Middle East investors who are looking to expand into this asset class because they’ve gotten more and more comfortable by watching it over the years and being able to see the performance.

Shiloh:

So, what else is Nuveen doing with CLOs?

Himani:

So far what we talked about was all investing in CLO equity and Nuveen managed CLO equity. What we also do on the platform is invest in other manager’s CLO tranches, anywhere from AAA through equity and we’ve been doing that since 2007. What we noticed after 2020 is that a floating rate asset class picked up a lot of interest, and CLO AAAs got the benefit of it to begin with.

What we noticed was over a period of time, I think the CLO IG tranches in general are very solid in terms of almost zero impairment over the last 25 years because of the subordination, the non-mark to market cash flow, sequential waterfall type of structure that CLOs have has brought really good excess return on a risk adjusted basis for these tranches. So, what we have is an ETF that is more focused on a single A on average single A, a type of an offering for our retail investors in an ETF format. So, it gives you daily liquidity. It has excess distribution/return versus say a CLO AAA fund but has a strong subordination and the history of almost zero impairment, like I said. So that is a very nice, sweet spot. But over and above that, if you think about the yields that we see in all these CLO tranches, a good portion of that is SOFR. So, it’s SOFR plus a spread. In our view, as SOFR reduces at some point in time, we are all expecting it to happen, especially with the rates as to where they are expected to go. This fund provides an excess return because the spread is a bit higher than what you see on AAAs, so it’s a nice adjustment or nice balance of risk adjusted total return from a longer-term perspective versus other fixed income asset classes. And that’s the way we structured that Nuveen ETF that we have based on it’s called an AA through BBB Nuveen CLO ETF. So that’s our ETF.

Shiloh:

Is there anything else that’s topical that we should discuss, either in the market or on your platform?

Himani:

Yeah. And the other one, just going down that thought process of IG tranches in single A ETF. We also have an interval fund. This interval fund is investing in CLO BB’s and some equity. It’s a quarterly liquidity type of a fund that we have put together registered. We launched it in January this year. The idea behind that is to give distributions on a regular basis. As you know, CLO BB’s offer. Call it 10 to 11% yield. The fund itself is almost 12% yield now. So that is another place where if an investor does not want to get locked in, in a captive fund to get 15% plus IRR, wants to have some sort of cash flow, but also extra return and liquidity. This is the perfect way to be able to access that. And the difference between the two by the way is one is focused on the Nuveen platform and the other one has zero Nuveen exposure and it’s more diversified. We trade in and out. We are managing the risk on that, and there is secondary market liquidity on both ways. So I think there is a very interesting offering for investors who would like to participate in the CLO market without taking direct, locked in equity exposure, but are ready to take some more risk on a volatility basis, in particular, because this fund will be a little bit more volatile than a single A fund, but are ready to take that type of exposure. And by the way, even CLO BB’s have subordination. So, the impairment and the losses for a fund like this are not going to be large on a relative basis versus other fixed income asset classes.

Shiloh:

Great. Well, Himani, thanks so much for coming to the podcast. I really enjoyed it.

Himani:

Thank you so much.

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.

General disclaimer section:

FlatRock may invests 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 FlatRock or its affiliates.

Any return projections discussed by podcast guests do not reflect FlatRock’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.