Podcast: The CLO Investor, Episode 7

The CLO Investor Podcast, Episode 7

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 leverage loans. In this podcast, we discuss current news in the CLO industry and I interview key market players. Today I’m speaking with Patrick Wolfe, the middle market CLO manager at BlackRock. I’ve been investing in Patrick’s CLOs for over a decade now, and BlackRock is the largest CLO equity manager across Flat Rock funds. In last week’s podcast, Paul Nikodem and I discussed some of the metrics that are used to pick CLO managers and Patrick’s CLOs and his platform check all my boxes. Other investors seem to agree as BlackRock is able to get some of the best CLO financing rates in the market. Our primary discussion was an update on middle market loans and how Patrick sees his platform as differentiated. We also discussed the risks he sees for CLO investors in today’s economy. Many of the questions I pose to Patrick are the same ones investors are asking me, including how borrowers are managing higher interest expense and if there are enough good middle market loans for everyone to get enough. So we’re going to hear the answers in this case directly from the horse’s mouth. And now my conversation with Patrick Wolfe. Well Patrick, thanks for coming on the podcast.

Patrick:

Yeah, thanks for the invitation. Happy to be here.

Shiloh:

So I understand you were recently at a CLO conference in Barcelona. What was that like?

Patrick:

The vibe of the conference was very positive. You’re seeing a lot of demand from a lot of new regions. Slowly different regions have come back online. So it was interesting, we had meetings from people from all over Europe, from Middle East and even as far away as Japan and Korea. So it was very well attended and a lot of people are exploring adding CLOs to their portfolios or turning it back on. We even met with a bank from Greece who was exploring adding middle market CLOs. So it was really an eclectic group of people there. And the weather and the food of course is always nice in Spain.

Shiloh:

I would think that would be a very compelling part of the conference. So why don’t we start off and if you could just walk us through your background and let our listeners know how you ended up managing CLOs.

Patrick:

Happy to. So I worked for Deutsche Bank around 2006 in structured products and luckily was a junior person at the time when we went into the global financial crisis and worked all the way through the global financial crisis. Saw a lot, got a lot of scars, had a lot more hair at the time, and worked on some really interesting bankruptcies in CLOs and gained a real good foundation of how to manage A CLO and at the time how to manage CLOs in difficult situations. And then post the global financial crisis around 2012, 2013, I got approached by 10 capital partners who was more of a multi-Strat credit firm. They asked me to join them as they looked to start issuing middle market CLOs and I joined the firm in 2013. We were acquired by BlackRock in 2018, so I’ve really been in this same role for almost 11 years now. We’ve become a large issuer, middle market CLOs. I think we’re on number 14 today and we’re approaching around a little over 6 billion of middle market CLOs. But the broader direct lending platform, which the middle market CLOs sit a part of is about 25 billion today. Or I also play a senior role as portfolio manager on the broader direct lending funds. But my history and my background was born in structured products.

Shiloh:

So then why don’t you give our listeners just a 1 0 1 on middle market loans and how they’re different from broadly syndicated loans, which are the bigger part of the CLO market.

Patrick:

So there’s quite the difference between middle market loans and broadly syndicated loans, or at least there has been for the last few decades. Middle market loans, I like the phrase is very much farm to table credit as we have to go out and originate and find the opportunities and we have to structure and underwrite and actually go visit the site and spend time with management and really manufacture an investment opportunity from scratch where a broadly syndicated loan, all your large investment banks, Morgan Stanley, Goldman Sachs, JP Morgan, all these large investment banks are out there syndicating away small pieces of loans and you typically get asked a question, do you want to buy this loan and at what price? So it’s much more of like going to a grocery store. You can go on Bloomberg and sort by industry sort by rating and within a day you can acquire a hundred broadly syndicated loans with a few phone calls to a few of the big banks.

We’re in middle market, like I said, we’re out originating the asset. We have much bigger teams required and we’re typically providing financing to help the middle market economy. Think of companies around 50 million of ebitda and in some cases they are selling their business to a private equity firm or they’re acquiring a competitor, but they just need some middle market financing to grow their business or transact. And that’s really the big difference is that middle market is very much a much bigger time commitment and amount of resources because like I said, we don’t just get to go on Bloomberg and pick from a pool of loans with a few phone calls.

Shiloh:

So the typical loan that you’re underwriting today, what do you think the average loan to value is and what’s the spread over SOFR?

Patrick:

So the average loan to value is going to be in the high thirties to low forties for first lien senior secured loan. And that’s really the only place we’ve been focused in the capital structure over the last couple of years is the first lien and that today is probably around SOR five 50 to SOR 600 today at that loan to value about nine months ago, I would say it was 600 to six 50 over SOFR. So we really have seen some spread compression over the last six to nine months, but relatively speaking, we’re probably a little bit wider than our historical levels. So it still has been a very compelling time to be at middle market lending. We still get covenants in our loans. That’s a big benefit of the middle market as we are negotiating and manufacturing and structuring these. So it’s hard to say it’s apples to apples to the broadly syndicated loans because those loans typically do not have covenants. So we have in a way a better structured downside protected credit agreement at a wider spread. So that’s where we’re seeing levels today.

Shiloh:

So one of the things I’ve been seeing is private credit, middle market lending has just become more and more popular each year. Are there enough middle market loans for everybody to get their share given how many competitors there are in the market and how much money’s been raised in the asset class?

Patrick:

That’s a very common statement that people do not expect there to be enough loans for everything to go around. I think people underestimate the size of the middle market economy and also where that economy is. Those companies are in their life cycle. A lot of these businesses are still owned by founders who could be from the baby boomer generation who are getting older and we’re starting to see a lot of companies transact. And there’s a quote that there’s over 50,000 companies in this 25 to 75 million ebitda and a very high percent of those need to go through a generational shift in the next 10 years. So there is by far more loans than there are capital for today. I do think direct lending on real market lending is very underfunded. When you look at the amount of private equity dry powder that’s been raised over the last few years, there’s estimates anywhere from around one to one and a half trillion dollars of private equity dry powder, and as I just mentioned on the loan to value, it’s close to one-to-one and direct lending is somewhere in the hundreds of billions from dry powder. You really need it to be closer to parity with that. If anything, direct lending is underfunded relative to private equity and there is a huge portion of our economy in this core segment. I do think there is room for more competitors and there’s plenty of deals. We are very selective. We only execute about 5% of the deals we review every year. So that’s maybe anywhere from 60 to a hundred deals a year on average. So yeah, I do think there’s plenty. And if anything, direct lending is underfunded relative to the broader private equity markets

Shiloh:

And with a lot of your loans being created in leveraged buyouts, do you think that is some activity that’s going to pick up later this year or is it that the higher base rate of SOFR has just really slowed down that market substantially and maybe there won’t be an increase until interest rates come down

Patrick:

The last two months. We’ve seen it up month over month, April, may. We’re very, very busy. We’re continuing to see it pick up. I think rates will only pour gasoline on it. When rates do come down, I think m and a activity will pick up a fair bit and it’s going to be really on the buyers and sellers agreeing to a price. We have seen a lot of businesses put up for sale and there’s just a really big bid ask and over the last few months that’s gotten closer and you’re starting to see businesses transact. But I think once rates go down, there’s a lot of private equity portfolio companies that need to be sold. Some of these private equity funds are getting really, really long in the tooth. They’ve been in existence for over a decade and the investors are the limited partners. They want their money back.

So I think as soon as people have a good feeling that rates are coming down and you’re going to get a slightly better valuation, you’re going to see a huge pickup in it. But right now we are seeing pretty substantial pickup in m and a, but I would say that these are actually more new businesses that have grown really well and fared very well in the high rate environment. You really haven’t seen a business that’s just bumped along as a lender. A business bumping along is very much okay, you just don’t want to see it go downhill. Sometimes when a company does too well, you get refinanced really quickly and all your hard work was only worth about a year of interest coupon. So a company that just slowly grows, bumps along, it’s great. And we haven’t really seen those companies transact. It’s the private equity sponsors either hope and rates come down, it helps them grow top line or create better margins. But the election’s still out there and rate cuts. Now with the news today, people are pricing in a cut post November. It’s not the multiple cuts people originally expected, I think early part of the year. So I think there’s still some uncertainty, but it’s coming. There is a wave of m and a that we’ll see in the next, I’d say six to 12 months.

Shiloh:

So you mentioned that you’re highly selective in the loans that you make. Are there some industries or particular red flags that screen out a lot of borrowers in terms of your credit box?

Patrick:

Yeah, commodities, cyclical businesses. You really want to be careful when you need a crystal ball to predict their ability to be refinanced in the future. If they have a hard time meeting their breakevens at where a barrel of oil is priced at, you really don’t want to make a bet where the barrel of oil will be in four to five years when you’re loan needs to be refinanced. So we tend to avoid businesses linked to commodity inputs. We also tend to not very cyclical businesses as well. As a lender, you really want stable growing businesses. So where we have probably done better than most is on technology software specifically. That’s an industry that we’ve liked for quite some time now and software just continues to be a bigger and bigger part of everyone’s day-to-day life. It helps people grow their business, run their business. And during covid we saw a lot of these software businesses do fairly well where a lot of people question their ability to maintain a tough macro environment and these businesses can be very asset light. It doesn’t take many people to keep the lights on at some of these software companies so you can quickly cut expenses. So we continue to like that very much technology growing growth businesses, we are very much less into the manufacturing, high cost, fixed cost type business structures. We do like insurance services. I like to say I like car wash roll-ups more than healthcare. So those are always fun to discuss.

Shiloh:

So in terms of the competition for middle market loans, there’s lots of other firms out there who want to originate these loans. Do you see yourself as competing based on price or the economics of the loan or are there some reasons that people would select your firm that aren’t just tied to the economics of the deal?

Patrick:

Economics today seem to be less and less as much of a deciding factor. It definitely matters where it is, but everyone’s coming out around the same area. So for the ballpark, for example, if we say we think a loan should be price at SOFR plus five 50 and someone else thinks it’s SOR plus 5 75, it’s really not that big of concession where you’re seeing the ability to win transactions is really off reputation size of firm. Are you going to be able to grow with the business? Is your firm something that could be much more of a long-term financing solution partner? That was something at our legacy firm that we felt we missed out on is that we were really only able to finance your business when you were 50 million of ebitda, 75 million of ebitda. But if you very much grew and maybe wanted to go to an IPO or maybe you were going to move to the high yield market, our firm was stopped being able to provide financing.

And we have seen a number of transactions where I think we won the transaction maybe be even a hair higher on pricing, but they viewed BlackRock as much more as a long-term financing partner is that we could grow with the business if they had ambitions for an IPO BlackRock, it would be one of the bigger IPO buyers just by what we participate from our ETF business. And that’s something that I think has proven to be really helpful in competitive situations. The other place that we’ve historically excelled at is that our team on the underwriting side and the management side is constructed by industry specialization. For example, our head of healthcare comes from private equity. He’s very much still has a private equity mindset so he can have much more of a peer-to-peer conversation with the sponsor of the private equity firm or even the CEO and CFO.

He really speaks their language that definitely has helped us win transactions and competitive environment. We’re not very much a generalist or a generic banker or just a cheap cost to capital provider. We could be much more of a partner, a financing partner that’s going to understand the issues that they go through, aren’t going to be scared of a typical delay that we are used to seeing in that industry or that subsegment where someone that’s very general isn’t used to manufacturing delays in pharmaceutical drugs and that’s something that happens from time to time. So that is another place where we’ve historically been our biggest competitive advantage is that our team has industry leads and they manage the investment from entry to exit. So they continue to work with the management team and the sponsor. So that’s some of the ways we’ve been able to compete that is beyond just pricing and economics, but there are some sponsors that that’s all they care about and we tend not to excel with those sponsors because we don’t want to race to the bottom. So we tend to look for much more long-term partners.

Shiloh:

So for somebody sitting in my seat, whenever we model CLO equity, we put in a 2% default rate into all of our projections, we put a 70% recovery rate in. How do you think those projections will fare for the next coming years here?

Patrick:

So in middle market I think that’s still a very valid assumption, 2% constant default rate at that recovery. I think broadly syndicated equity is having a tougher time. I’ve seen recoveries for a few of the rating agency research reports on in court restructurings being sub 20 and you’re seeing out of court restructurings being in I think the mid fifties. So everything that people have been nervous about in the broadly syndicated loans with the weaker credit documents and not having covenants is leading to lower recoveries in bankruptcies. The benefit of middle market is we still have that feel of what the leverage loan market was 15 years ago with a high percentage of our loans or mostly all of them with covenants of the ability to get to the negotiating table before too much principle loss creeps into the story. So I do think core middle market is just even direct lending. That is still a very much a fair assumption. I do think on average we probably outperform the default rate and I think the recovery is plus or minus five to 10 points from there and probably averages out to 70. Ours is in the nineties when it comes to our CLOs that have had defaults over the last 12 years. But I do think in this credit environment there’s going to be a tougher time and I think two and 70 in our market is a very much a fair assumption when modeling out that investments.

Shiloh:

So in the broadly syndicated market, there has been some weaker credit documentation that has resulted in some low recoveries. Do you feel like in the middle market you’re still getting the documentation that you want and that there isn’t a risk of a looser documentation in your particular market?

Patrick:

There’s definitely a risk in our market and we are seeing the segmentation of middle market loans or direct lending playing a big part in that. So we view the market in three segments. Let’s say lower middle market is zero to 25 million of EBITDA is the lower segment core being 25 million to a hundred million of ebitda and then upper it being a hundred million plus that upper middle market has gotten very competitive and we’re seeing reports of less than 10% of those loans having covenants where on average the core middle market is closer to 70% of the loans having covenants. So you have seen some of the broadly syndicated credit documents start to creep into our market. We’re doing everything we can to hold the line on it. One thing you can get comfortable with is maybe not the financial maintenance covenant, but where you’ve got to be careful is some of the negative covenants like your ability to up tier or execute liability management transactions or lts. You have seen that creep in not anywhere to the same degree in the probably syndicated market. And one thing people forget, there’s very smart lawyers out there and even though J Crew Serta chewy are some of the more famous bankruptcies and we all focus on making sure the weaknesses that were exploited in those bankruptcies are tied up. There’s no saying that someone’s not going to create the new weakness.

Shiloh:

It’s a bit of a whack-a-mole I’ve heard.

Patrick:

Yes, it is exactly a whack-a-mole. There’s lawyers out there trying to figure out every which way to weaken the document and find a loophole to exploit some of these things. If you go back five years or even seven years in our credit documents, the Serta protections might not be there because no one believed they needed them. So the document is always evolving and one thing I like to highlight is there’s almost like a red yellow green from a strength protection, some of it. So right now what we thought was a strong credit protection to protect you from Serta, today’s age might be only lightly or moderate. So when you do have an amendment, do you want to rewrite that protection the document to be even stronger because even though you might’ve thought you had the protection, the lawyers find it the loophole to get it. So the document is always evolving, it’s always going to be whack-a-mole and private equity sponsors will try to find loopholes to protect their investment, their fiduciary to their investors. So if they could exploit some part of the credit document to increase the recovery or create a recovery, they’re likely going to do so that’s one thing that we’ve always been focused on is the sponsors are great until they’re not.

Shiloh:

So then one of the things I’ve also liked about middle market is just that when a company does get into stress that you only have one or a handful of lenders that are making the call and broadly syndicated, you might have a term loan that’s a billion in size and you might have 40 or 50 different people with opinions in the restructuring process. You might have a high yield bond, a second lien lawyers taking all kinds of fees for their time. All that’s going to eat into the first lien recovery.

Patrick:

That is a big benefit that we have. We’re typically the only debt and we’re mostly the first lien. It’s typically only first lien senior to secure loans. So it does make for a lot cleaner restructuring. A lot of times it’s done out of court. We don’t have to go through a formal bankruptcy system that can be very costly and just decreases your recovery as a lot of people get paid in restructurings and it could be 15 20 million in fees going out the door. So the direct lending, you have a much more of a sitting down across a table workout of a restructuring in some cases only one lender or a couple lenders. And for the most part everyone’s in agreement and there isn’t typically one lender trying to create a priming facility. It’s very much everyone’s arm in arm trying to get to the best outcome for the restructuring.

Shiloh:

So one of the questions I think I’m asked the most is just that as the Fed has hiked rates, loan yields are in, call it the 10 to 12% the area, are the borrowers able to make those interest payments over an extended period of time or do they really need the fed to start cutting in the future?

Patrick:

No, a very high percentage at least of our portfolio are still well above one and a half times from an interest coverage standpoint, meaning they’re able to still service the debt. I think for the private equity returns to pencil out to what they were initially underwritten at, they’re going to need to see the Fed to start to cut rates. We’re not seeing interest rates alone push a company into distress or de-stress. It’s typically interest rates plus a loss of the customer interest rates plus a supply chain issue. So for the most part, the companies have been able to manage the higher rate environment. They just had a lot less room for error. It kind of magnifies a mistake right now. I think if the interest rates start getting cut, it gives them a little bit more room to lose a customer to have a supply chain delay and still have liquidity to manage through. It just really has made it much more difficult for them to make a mistake. It’s hard to recover with their interest rates where they are.

Shiloh:

So do you see the higher rates is basically just transfer in economics from private equity firms to middle market lenders?

Patrick:

That’s exactly correct. We’re going from mid single digits to teen type returns on the assets and that is coming out of the equity ownership of the business. So they’ve benefited from low rates and very high returns for quite some time. And the term that gets thrown around a lot is the golden age private credit and it’s really the first lie loan is making almost equity like returns from a yield standpoint.

Shiloh:

So that’s why I think it’s so many headlines and so much interest in the asset class. It’s just that double digit returns from a security where you’re in the top of the capital structure. So one of the key trends in CLOs this year has been declining CLO financing costs triple eight down to double B. How does that affect your business in terms of issuance? Does that make it more likely that you’ll come to the market deals in the future or will you look to refi reset the deals that are already outstanding?

Patrick:

From a new issue standpoint, it doesn’t really change what we had planned for the year. From a new issue standpoint, it definitely makes things more appealing. Where it does change our plan is on the reset refinance side of the equation. So at the AAA levels we are today, a lot of the deals that we’ve priced over the last couple of years are all of a sudden it looks compelling from an equity return standpoint to go out and reset the deal for another four years and possibly lower the borrowing costs slightly. So that’s where I think you are seeing a lot more activity as people are starting to refinance and reset new deals. Middle market is less tied to a few basis points. Even when spreads were 75 basis points wider than they are today. People were still out there constantly issuing middle market CLOs because we just have a lot more spread in our assets and if a quarter basis, 25 basis points doesn’t necessarily make or break our returns like it does in broadly syndicated equity where they’re trying to get to a couple basis points of a model from an arbitrage standpoint because they’re going to magnify it 10 to 12 times and probably syndicated.

So every basis point really matters at that magnification middle market. CLOs can be anywhere from three to six times levered, so it’s less of a magnifier when we’re talking a few basis points. But I think reset activity does definitely pick up the back half of this year.

Shiloh:

So BlackRock has both broadly syndicated and middle market CLOs. Are the investors in those two different securities, are they different folks or do people play in both your middle market and your broadly syndicated issuances?

Patrick:

So we definitely do have a middle market US probably syndicated and European CLO business as well, which is syndicated loans there. We do have crossover on the debt side for sure. People are familiar with the platform, how robust our risk management functions are our Aladdin systems and they definitely get the benefits of underwritten one of the teams. There’s going to be a big portion of their underwriting completed, so they do get a synergy of that. So we definitely do see overlap on the debt investor side. On the equity side, I do not believe the middle market overlaps with the probably syndicated, but I can’t say it for a hundred percent certainty.

Shiloh:

Is there anything interesting happening in the market that we should touch on?

Patrick:

I think one thing that doesn’t get the attention in middle market loans are valuations. This has become really important recently for the AAA investors as because if a loan isn’t being marked a fair value, there’s no benefit or protection to the or other debt holders. From a triple C haircut standpoint, we’ve seen the S and p triple Cs creep up from a historical average where by nearly the s and p averages, most people are going to be having almost some form of a triple C haircut. Well, that haircut only protects you if the loans are being marked a fair value. If they have all the loans marked at par or near par, it doesn’t give you the protection,

Shiloh:

Then there’s no haircut on that.

Patrick:

There’s no haircut at that. So I was on a panel recently where another manager was saying they self mark their loans and they didn’t see the need to value their loans. And there’s just so many reasons why valuations should be done If you have a B, D, C, it has to be done, but the frequency and the way you do it is not standardized. And then when people are looking maybe to make direct lending fund investments, like if you’re just going to invest in someone’s fund, one manager might be marketing their book to represent fair value and their returns might look lower than a manager who doesn’t mark their book. So I think valuations is something that helps level set the different managers and also gives you a good third party view of the credit quality of the portfolio. One thing that I think you’re good at and the they’re good investors at is they look at the market values of our loans that are done by third party valuation agents and it could quickly tell you what loan is maybe underperforming or having issues.

It quickly highlights where outperformers and underperformers are, and you don’t necessarily need to be familiar with all the underlying borrowers, but this third party has gone in and reviewed the financials, has spent time with the budget as a really good understanding on how the company is performing. So if there was more of a standardization of valuations where everyone was doing it every quarter and they were doing it to market, there’d be a much more clear playing field where it’s really hard to light up managers side by side from a return standpoint because one manager might have unrealized losses because they’re marking their book to reflect the credit quality where one manager hasn’t marked his book and has everything at par, even though they might have problems underlying. Now you see the BDC analysts talk about it where one manager has a loan marked at 75 and two managers have it marked at par. So it’s one place I’d hope there would be more standardization and more people getting to quarterly valuations of the portfolio.

Shiloh:

I definitely see that when we pull up CLOs and Intex, sometimes all the loans are marked and that other times just some percent, it could be the CCCs are marked defaulted loans. There’s always going to be a mark for those, I think. But for my seat, yeah, if you can get a hundred percent loans marked, that would enable investors like me to compare returns apple to apples. And then it would also increase just the liquidity of a CLO manager’s shelf because at the secondary market, people would freely trade bonds if all the loans are priced and it becomes more challenging if there’s just some blank fields by the loan prices. So one thing I do see in our middle market CLOs is that sometimes there’s some broadly syndicated loans that make it into the portfolio. A lot of times these are, I call them maybe lightly syndicated loans where maybe they’re underwritten by a Jefferies or a UBS or something like that. Do you guys ever see value there for your middle market CLOs?

Patrick:

We have in the past. I’d say that market has gotten smaller over the last couple of years. We’re seeing less and less through that lightly syndicated. There’s still to us important to be middle market borrowers, so there’s still sub a hundred million of ebitda. Those do have some benefit is that you can in some situations actually drive change to the documentation. It’s not as much of a yes or no at what price transaction. It’s very much more of here’s the business. You could spend time with management if you like. You could do the same level of diligence that you typically like and in some markets they’re open to doc changes, improvements. We’re willing to come into this deal, but we need these two sections of the credit agreement tightened. Maybe we need a little bit more pricing. And in some markets we found some really compelling opportunities that almost felt private in the end where we went out and met management team and there are some that come in three days and it’s how much do you want to buy and at what price?

And those are less likely for us to participate. But they have been a way to add additional assets in some industries and even some businesses we know that was probably five, seven years ago was a common exit for us is we did a private deal and then the next step was to the lightly syndicated bank deal. We see that less and less now where a company just stays primarily in the private credit space where it goes from our market to another one of our peers that does bigger deals. With some cases we participate in enroll and sometimes the pricing is going to be so low or the documentation is not what we expect, so we just go home. But that is now, I would say the more traditional graduation from our segment to the larger segment of the market.

Shiloh:

Well, I think that’s all the questions I had. So Patrick, thanks so much for coming on the podcast. Really enjoyed our conversation.

Patrick:

Thanks. Always great to chat.

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

EBITDA, or earnings before interest, taxes, and depreciation, is a proxy for a business annual cashflow 

Roll-up strategies are when a private equity sponsor is actively looking to grow a business through acquisitions. 

Loan to value is the value of the first lie in debt divided by the enterprise value of the company. 

LMT or liability management transactions are an out of court modification of a company’s debt 

Up tiering 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. 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 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. 

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

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

ETFs are exchange traded funds.

High yield bonds are corporate debt rated below investment grade and sometimes referred to as junk bonds. 

Reset is a refinancing and extension of a CLO.

 Investment interest coverage ratio compares a company’s annual cashflow to its interest expense. 

Intex is software that CLO practitioners use. 

General Disclaimer Section: 

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