Inside CLO Banking: Teams, Issuance, and Execution

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 Brad Larson, Head of US Global Credit Financing at CIBC.  Brad is one of the bankers that restarted CLO issuance post the financial crisis, and someone I’ve done multiple transactions with.  We discuss the opportunity he saw in CLOs in 2010; what creates a good CLO banking team and why CLOs are easier to create today vs. a decade ago.   As you’ll hear in the podcast, today Brad has more responsibilities than just CLOs and Gabby Garcia runs the CIBC CLO issuance platform.   I’m always looking for interesting guests to have on the podcast.  

Email us at info@flatrockglobal.com if you’d like to come on. And if you’re enjoying the podcast, please remember to share, like and follow. And now my conversation with Brad Larson. 

Shiloh Bates:

Brad, thanks so much for coming on the podcast. Good to see you.

Brad Larson:

Absolutely. Shiloh, great to see you. Thanks for having me. This will be fun.

Shiloh Bates:

I’m sure it will be. Why don’t we start off with your path to the CLO market?

Brad Larson:

Sure. It was a long and winding path to the CLO market, actually. I’ll take you way back. I went to the Krannert School at Purdue University. I majored in finance there. I always wanted to get into banking. Didn’t quite get it done coming out of Krannert, so I took a little bit of a couple of year pit stop, managing consulting in financial services, but I was working in Chicago at the time. I was determined to make it back to New York and have a career in finance. So I did a self-search a couple of years out of coming out of business school. Made it back to New York. I was able to get a couple of interviews and ultimately one stuck. We got an opportunity at Prudential Securities. And I was meant to join that next associate class coming out of business school. But because I was already out of business school and available, I got a call from Pricewaterhouse at the time and they were curious if I could start early because again, they knew that I was available.

And Lisa, my wife, she was five, six months pregnant. Aat the time. She hopped on a plane, flew back to New York, found an apartment. The fifth floor walk up in a fourth floor building. When I started my career in finance, it was a terrific opportunity. I was in the financial institutions group at Pru Securities. That’s where I got my first taste of securitization. Loved the group. Loved the guy that I was reporting to, a guy named Carter Rice, who ran FIG. But after about nine months, honestly, a pretty significant part of the group moved from Pru Securities to Credit Suisse, actually, to work in their securitization group. And Pru decided to de- mutualize and get out of banking. So I, fortunately, for a variety of reasons, which I won’t go into, I was already having conversations with B of A (Bank of America), so stepped right into a specialty finance group at B of A Securities.

But ultimately, one of the biggest clients at Pru, a company called Pegasus Aviation, which they financed themselves through the aircraft securitization market. They were an aircraft leasing company, called me up. The guy that ran Pegasus, a guy names Rich Wiley, president of Pegasus, called me up. We had met at a dinner, honestly, my first week of Pru and said, “Hey, I’d love for you to come be an internal banker.” And that was my second experience with securitization technology, if you will, because again, that’s how Pegasus financed itself. And ultimately, went from Pegasus Aviation. That was January of 2001. Went from Chicago to New York to San Francisco, where I’m from, where Lisa and I met at UC Berkeley in that Bay Area. We always thought we wanted to get back, but basically had gone from Chicago to New York to San Francisco in the span of about a couple of years.

And then September 11th, 2001, obviously that was a horrific day. That significantly impacted the aircraft business. All of a sudden, Pegasus turned into a workout situation itself. I ended up that next year reuniting with a bunch of people at a company called American Capital Access, or ACA is what it became known as. And there I entered securitization from a buy-side perspective. But long story short, my start in CLO started at Credit Suisse, where I joined in June of 2010. 
Honestly, before the CLO 2.0 market had restarted, I remember doing an
interview at CS and I ended up typing a white paper email on why I thought the CLO market would return. I didn’t have many believers, obviously post-GFC at that point because I lived through the GFC at ACA. But I landed at CS in June of 2010 and I was determined to help the market restart and help CS restart the business.

And I did. We got our first deal done in, obviously some internal approval stuff to get through coordinating with our Securitized Product salesforce, to get them on board with marketing our deals. But, we did our first deal in May of 2011. It was an ING deal with Dan Norman and Jeff Bakalar. They became Voya as you know over time, and I will forever be indebted to Dan and Jeff. And Mark Boatright was there back then among others. That was the first deal. That was actually one of the initial 2.0 transactions that were done back then. We did our second CSAM deal in October of that year. And 2011, you recall this, when the market restarted, but it wasn’t fully back. The market definitely wasn’t believing there were still investors who weren’t buying the asset class. It wasn’t until a few years later when I really feel like the market was back in a big way.

And I remember people at CS honestly just doubting that it would ever come back. “Oh, you’re trying to restart a CLO. That’s not going to come back. Too closely associated with CDOs”. But here we are. 2025 is going to post the second consecutive all time issuance market. So it’s definitely back. In fact, I think you and I, if I recall correctly, we worked on a deal back in 2012, 2013. I think that might have been your first venture into CLO equity if my memory serves. 

Shiloh Bates:

I think you’re right.

Brad Larson:

But it’s been a long ride.
In June of 2012, I assumed the global head role at Credit Suisse for the CLO
business. We had yet to do a European deal, but we were off and running in the US side. As I just mentioned, we actually did the very first European 2.0
transaction. That was in Q1/Q2 of 2013. That was a Cairn Capital deal that we did. And obviously that market’s back and I think people expect that market maybe to post a new record next year. And so it’s been a long and fun ride. I think the market from a people perspective, it’s a great market. A lot of good people, a lot of managers out there. It’s just a lot of fun.

Shiloh Bates:

Maybe too many managers actually.

Brad Larson:

Maybe. Maybe we’ll get into that later. But that was a very long history of how I got into the CLO market. But like I said, it’s been a fun ride. I’m not quite as close to the CLO market currently, but it’s my roots and where many of my friends still work, so I’ll always stay close to it.

Shiloh Bates:

So in 2011, when you moved to Credit Suisse and your goal is to restart the CLO market, I mean, back then, equity and even BBs and BBBs would’ve been trading at pretty discounted levels. So, how did you see that opportunity and what was the rationale for new investors to put in capital at par?

Brad Larson:

I thought of it more from the perspective of how important I think the CLO market was to the US economy, frankly. It’s how a lot of companies finance themselves. I never really thought the loan market was going to go away, though I’m talking about obviously the leverage loan market, pre-crisis through the crisis. There was never really a problem with the loan market. Candidly, there was never really a problem with the CLO structure itself. Nonetheless, CLOs did get lumped in with CDOs, and certainly from a market value perspective, CLOs had some pretty big swings through 2008, 2009, even 2010. I thought of it less from that liability perspective and more from an asset perspective. And CLOs, part of that white paper back then that I referenced a few minutes back, CLOs are the most natural buyer for the loan product. So from that perspective, I just believed CLOs would come back.

CLOs also ultimately performed through the crisis. So I just believed that there would be buyers for equity. There would be buyers for junior mezzanine, and you could find ways to make returns work. And I just felt like all constituents wanted this market to work. Certainly banks with their broadly syndicated loan groups and their leveraged capital market efforts. Creating those loans for corporate America. They wanted loan product out. CLOs were the buyer base. You had CLO managers that were getting paid for the assets that they were managing. It was CLOs were a pretty effective way for these businesses to scale their AUMs. So, they were certainly motivated to do it. And I just felt like there would be, coming out of the crisis, given that, again, CLOs ultimately performed that there would be a buyer base to develop from a liability investor perspective. And that’s really what I was counting on back then. It was a little less, does the arb work? Are these structures going to work at maybe discounts on some of the junior mezz? I just felt like we would find ways, the market would find ways to compensate investors to be involved because again, I just felt like there were so many forces that wanted to see this market return.

Shiloh Bates:

For CLO banking, there’s a couple different roles. At a bank, there’s the CLO banker, which was you, there’s capital markets, and there’s salespeople. Maybe could you just quickly hit the roles there and who’s doing what when a new CLO is coming together? 

Brad Larson:

Back in 2011, there were only a couple of us on the desk at CS and we were doing a little bit of everything. I mean, I was pouring through OMs, I was negotiating engagement letters and warehouse agreements, and I wasn’t doing any of the real hardcore structuring. It was done by those more quantitative structures on the desks. Andy Poshing was my right-hand person back then. He’s now at Barclays and had a long career at CS prior to that. But basically you have teams that go out and help that originate the structures. That was effectively largely me and Sandeep, as well, and a few others. We were going out, meeting with managers, seeing if we could compel them to give us a mandate. Back then it was a lot less competitive. There are probably five or six banks out there chasing that business. Today there are circa 15 to 20, so it’s much more competitive today. So, it’s part pitch, get out there and originate a deal. And I think everybody needs a hook to win a deal. Some people bring good loan products. Some people can buy AAA, some people come backstop equity. Ideally, you have some hook. At Credit Suisse, we had

a pretty active private bank buying CLO equity, that was a pretty compelling
element to the business to convince people to give us a shot. Once you win that mandate, you usually have some combination of structuring people and portfolio credit analysts helping you sign up what’s known as a warehouse agreement. It tends to be anywhere from a one to three potentially five-year facility within which managers and/equity can start to build that loan portfolio to a point of critical mass at which you can start to market a deal and ultimately get it done. Then you have your structurers. Oftentimes, again, there’s an overlap between the actual hardcore structuring of the transaction that’s working with the rating agencies, and your manager, and your
equity investor if it’s not the same.

And over time, your debt investor base basically to create a capital structure that gets rated by typically one of S&P, Moody’s, Fitch. Capital structures are typically from AAA through BB, sometimes single B as you know. Again, you’re creating oftentimes a semi-optimized structure then go to once you have a structure that works for the manager and the equity. And oftentimes there’s a third party AAA buyer involvement in the creation of that initial capital structure because some AAA guys might want a little more par subordination than others. And so, you’re always kind of playing around with things to see if you can create a structure that can deliver the equity returns to the equity investor in a way that’s satisfactory to the manager to allow them to manage the portfolio effectively. And then, once you have that structure, again, there’s a syndication team that’s working alongside of that that’s always sizing up where they think they can get bonds placed and at what level and so on and so forth. And that syndicate works.

The in-between structuring and the ultimate sales force that’s going to work
with syndicate and the structures to get the bonds placed. And usually, you
kind of have all sorts of different approaches out there in terms of some managers in equity like to run longer portfolios and access a little more of the primary loan market collateral. Other guys like to ramp lightly and do a little more of that approach that’s known as print and sprint. You largely print the
liabilities so you can lock in your cost of debt in the CLO structure and then
ramp the portfolio quickly to make sure that you can hit the portfolio metrics
that you’ve just modeled. But the process that we’ve always run at CS, and I
know CIBC is still running this process, is usually one that tries to be in the
market in and out as quickly as possible.

We never really want to launch a deal and have it sit out there for three to four weeks. There’s the potential perception that a deal’s struggling and that never helps your cause to get the [debt] placed. And so we try to launch a deal pretty significantly placed so that we launch a deal, we wrap up the tranches and we’re out of market or priced within a week, max two.

Shiloh Bates:

What do you think the key skills are to be successful as a CLO banker? And I definitely remember being at more than a few conferences where you were picking up some award for being CLO Banker of the Year. Am I wrong?

Brad Larson:

No, I think that’s right.
I think that’s in one or two instances. I think CLOs are interesting. I think
of a team a lot like, I grew up playing soccer and played soccer at UC
Berkeley, Cal, that’s where obviously I went to undergrad. I think of building a
CLO team a lot like building a soccer team. Oftentimes, your 10 players on the
field that a soccer team fields are not necessarily always the 10 best, most
talented players on the team, but you need good strikers, you need good
midfielders, you need good defenders, you need different skillsets. And so, the thing is, most structures have a pretty significant quantitative background. And I really think structurers are the unsung heroes in a CLO business. I really truly believe that. And I think I said something similar on a Credit Flux panel many years ago. They’re just really, really underappreciated.

We’ll do a great job on a deal. The structurers will work around the clock and model just a fantastic capital structure and do it quickly and without any hiccups. And you price a deal and all of a sudden I get the call or head of syndicate gets a call. Structurers really should get a little more credit for that. But you need quality structurers. Where I was going with this is oftentimes the issue with structuring is because it’s such a grind and because it can be the thankless role, a lot of structurers, what do they want to do? Once they have four, five, six, seven, eight years of experience, they want to make the move to the buy side or move into origination or move into syndication. And so it’s actually hard to keep very, very talented structurers in that seat. But you need them. They’re critically important to the process, just like a specific player on a soccer field would be to the overall team, given that role that they’re going to play.

And so, I think one thing that we always tried to do at CS, and one thing that I think we did incredibly well, learned from my experience at CS and was pretty heavily involved in the initial build out of this CLO team at CIBC, we really tried to identify lead structurers who were very experienced, who wanted to do that, who lived and breathed structuring. That’s all they wanted to do. Sometimes we have to pry these guys off the desk to go to a client drinks or do a closing. Honestly, it’s pretty funny. They’re not really interested in that. They don’t want to originate. They don’t want to syndicate. You might sit back and think, “Man, in a perfect world,” they would be interacting a little more
with clients, the manager side or the investor side, and they do to be sure
they’re interacting with these guys in their day-to-day role frequently, but I
think we were able to do that incredibly well at CIBC.

So, I think what makes a successful, not necessarily banker, but group is building a team where you have people that want to be living and breathing what they’re doing. So find those structurers that want to be doing that. Find those syndicate people that are going to be comfortable, honestly, out interacting with the investor base and managers on a very frequent basis. That in itself can be a grind. They might not be in the office grinding away until 10, 11 or 12 o’clock at night, but instead they’re out building relationships with clients. And that’s really, really important. And you know what? Not everybody wants to do that. That can be a grind. So I think it’s really about finding these people who want to be doing exactly what you have them doing. That doesn’t mean there can’t be a little bit of mobility and versatility because there definitely is, but at their core, find those people where those roles are more natural for them. And then I think it’s, at

CS, we were a smaller team. Obviously, we had a big successful, good leverage
finance platform that was helpful. We had that private bank angle, which I
mentioned, but both at CS and CIBC, I think we’re relatively small compared to some of the bulge brackets. I think we’ve always punched above our weight from a productivity perspective. And I think that can be quite as simple as finding that right brand for that size, which tends to be, “Hey, we’re not going
to be the biggest, but we’re going to be more hands-on. We’re going to be more high touch with managers.” Kind of like to think that back at CS, we
started to do some of these mini non-deal roadshows before most the rest of the market. So, it’s making the manager feel, and it’s got to be credible,
it’s got to be genuine, making them feel a little more special.

Whereas sometimes people are a little more focused on volume and that’s great. And obviously they’re going to league table rankings, but we kind of like to play a little more in that middle-of-the-pack type space. We did at CS, I think we do at CIBC and I think we do it pretty well. We feel like we’re going to outwork people. Those that are going to be out, are going to be out a little more, those are going to be in the office, are going to be in the office a little more. Our hook is when I joined CIBC back in June of 2023, I really felt like, you know, Canada, we were seeing signs of Canadian investors showing interest in CLO debt and equity. And I just sort of felt like that’s still a relatively untapped market. And CIBC is obviously as a Canadian bank has very good relationships there. And so that was part of our hook as well is, “Hey, let’s get people up in Canada as much as we possibly can to meet that investor base who I think on the margin are a little more compelled to be interacting with Canadian banks relative to some of the others. And let’s turn that into a competitive advantage.” And so again, very long-winded answer to probably what was a simple question, but it’s a lot of the obvious stuff, but finding a hook and I think building the right team are two key elements to that.

Shiloh Bates:

So at CIBC, you guys have found a lot of Canadian investors that are interested in CLOs. Are they primarily playing up the stack in the investment grade or have you found pockets interested in equity and BBs as well?

Brad Larson:

Honestly, it’s all over.
It’s up and down the capital structure. I would say it probably leans a little
more toward the junior parts of the CLO capital structure, but we have guys
that are buying up the structure as well. It’s literally up and down.

Shiloh Bates:

So, one of the things that’s always surprised me about our market is that so many CLOs form. Every week more CLOs are coming to market and closing, but for each CLO, and there’s seven different classes of debt, and you have multiple investors in each class most of the time, and you have an equity investor and a manager, and all these arties need to come together and agree on terms. And a lot of times people’s needs, desires work cross purposes. The AAA, they have a different agenda than the CLO equity investor, for example. So everybody in the markets, they’re smart and they have maybe sharp elbows sometimes. So, I’ve always been surprised at how often it is that a banker can force everybody into an agreement that works enough that the CLO will come to life, but probably everybody doesn’t get exactly what they were hoping for at the end of the day. 

Brad Larson:

It’s gotten a lot easier in recent years, believe it or not. I mean, I remember back when you and I were doing more deals together back in ’11, ’12, ’13, ’14, the first three to five years, I remember I used to say it, honestly, I felt like every deal was a minor miracle to get done because the buyer base back then was just much more thin. And it was definitely deeper in the US. I remember in Europe, if you didn’t have, especially really early ’13 to ’14, if you didn’t have one or two key AAA investors involved, it was like, “Oh my God, how are we going to get our AAAs done?” So that was never really the case in the US. But you’re right, it’s really hard. There are just so many moving parts in the CLO market. You have a manager that obviously wants to ensure that they have the flexibility to manage a transaction that allows them to express their style. So, they don’t want to be constrained by unnatural limitations that might actually impact their performance because they’re not allowed to do what they want to be doing. Then you obviously have your equity investor that, yes, is likely going to have interest that aren’t entirely aligned with your AAA investor, and then you have all your parts in the middle. And you layer on top of that, that you have a loan market that’s moving every day. Honestly, what’s gotten better in very recent years, but for many years, the regulatory environment was changing every couple of years. So layer that on a deal that’s hard to put together in general. And then all of a sudden it’s like, “Oh my God, there’s a new regulation that we need to manage as well.” And so I used to describe it a lot as, what’s an expression people use, like herding cats or whack-a-mole. You have three issues and you solve two of them and all of a sudden another one pops up. So you’ve got two more to figure out. I think this is where I’d like to think, that this, too, is where by not taking on too many transactions, again, by focusing on a little more quality of the process and execution versus quantity, again, that volume game, I’d like to think that if you build the right team with the right people who want to be doing what they’re going to be doing and you don’t take on too many deals, if you just have more time to spend on every CLO project that you do, hopefully you’re running a tighter process. And so, can anticipate some of the issues that might arise, but the market has gotten more, first of all, the investor side has gotten significantly developed relative to 10 years ago.

I would say, generally, docs have gotten a little more standardized. And don’t ask me what, because I’m not as close to it these days as I once was. But I think it’s true. We just see, you have more of your standard, what are known as stips or stipulations that investors, these are comments on the doc or needs in the doc that different investors need to see. And again, if you have a little more time to work on every deal, again, you can be lining up. That’s where syndicate getting involved early. You have a deal coming up, the sort of manager profile that it is. You know the investors that want to be buying that deal if you understand where their axes are and the demand that they might have, you already know. Again, if you’re running a good program or good business, you know what stips they’re going to have.

You know how that’s going to line up with your manager. And so this is where, again, having a little more time to really develop that knowledge of the manager, that working relationship with the manager, having networking relationship with investors, have a little more time to run a process, you should be able to anticipate a lot of these things. But yeah, there are a lot of different interests that exist in these CLOs. It’s not the minor miracle that it was 10 years ago, but it’s still hard. When an asset manager maybe gets, [or] whatever the type of institution it is, when they get a new allocation, they usually don’t spread it out over a 12-month period. They find stuff they want to be buying and they put it to work. And this is where it’s very important, again, to be staying, there’ll be a theme to most of what I say, important to be staying in front of these investors because you want to know when they’re going to be basically fullydeployed.

So, you can go from literally one week, it feels like the investor side of the market is flush with capacity to two weeks later, they’ve spent it. So just managing through those situations can be a little trying from time to time as well. But again, this is where you need a team that’s going to be tight with a market and tight with their process to navigate through it.

Shiloh Bates:

I remember once we were out a long time ago and we were having a celebratory drink, one of the CLOs we
worked on was closing or had priced, and I said to you, I was like, “Oh,
that really felt like an easy one.” And I guess it was maybe from my
perspective, but you’re like, “Man, none of these are easy.”

Brad Larson:

I do feel like I used to say that a decent amount. It’s rare that they’re easy. I would say broadly speaking, they have gotten a little easier in more recent years, but even you can run into these timeframes that are really, really tough. I mean, take earlier this year. Markets wide open, we’re coming off, 2025 is going to be an all-time record year now. Following up an all- time record year last year, market got off to a pretty good start. Then all of a sudden April hits and we’ve got liberation, the tariff strategy and announcement that the administration made, and all of a sudden that threw the market for a curve. So went from being a
pretty good market with good demand and relatively straightforward to all of a sudden, I think if you’re out with a deal in that timeframe, you probably
struggled to get it done.

So there’s another example where it can be smooth sailing, all of a sudden storm hits and you got to figure stuff out.

Shiloh Bates:

So, let me tell you how I approach investing in CLO equity and maybe give me your insight because I think it might be different from some of the other folks that you work with. So for me, and you’ve mentioned that the first CLO I did was with you. It took me a second to even think back that far. But back then, that was 13 years ago and I was just learning, I was just starting to invest in equity for the first time and my boss sent me to two different CLO managers and the idea was to choose one where we were going to invest five million bucks or something like that. So, I go to both managers. They’re both some of the largest publicly traded alternative asset managers and you meet a very seasoned credit team and everybody’s wearing nice suits. And at the end of it, the boss is like, “Well, which one of these managers is going to do a better job on the CLO’s loans?” And I had to think about it for quite a while and I was like, let me just be candid, I do not know which one of these top managers is going to do better than the other, but what I can find is CLO specific reasons to choose one deal over another.

So CLO specific might be lower management fee, better debt execution, maybe a loan pool that has less CCCs or less defaulted loans, whatever it is. So that’s how I’ve approached the market for the last decade plus. And we do a lot of work on the manager and we have, not a formal approved list, but there’s the top quartiles who you’ll find, if you look in our schedule of investments, at least that’s our view of the top quartile. But I feel like other CLO equity investors don’t approach the market that way. I feel like there’s 130 different CLO managers out there and
they actually have really strong views. They’d say, “Hey, within this top
10 of CLO managers in terms of issuance,” some person at the manager says
something really smart in a meeting or something and they’re like really
excited to do the deal and they’ve chosen the manager.

That’s number one, two, and three, and the CLO specific things are less important. Listen, you probably know my competitors better than I do, but that’s how I think other people approach the market.

Brad Larson:

Honestly, I’ve always respected a ton how you’ve approached things. And again, it’s been a while since we’ve done something together, but I remember doing a decent amount with you many, many years ago and have obviously tracked your performance. Keep doing
what you’re doing is what I would say generally. Here too is an interesting
question. I’m not sure there is any one right strategy because it’s all over
the map. And I think it can be, whether it’s right or wrong, it can be just
they felt like a meeting went really well. Maybe it was a manager who gave them a little more time that day and was a little more respectful with how they answered questions relative to maybe the last manager that they met at the 45-minute speed date from a primary perspective. I think guys are probably a little more agnostic from a secondary perspective because it could just be a mere function of price.

Maybe they’re buying a manager in secondary there that they don’t dislike, but they maybe don’t love, but they’re able to get it at a price that is a no-brainer for them. So again, I do think secondary maybe is a little bit of a different situation relative to primary. I think it’s all over the place. I think some investors will look for those managers where they know they might struggle to raise equity candidly. So they feel like they can approach that manager and get more of a fee share, for instance, from that manager. And maybe they can lock up that manager for a multi-deal package where they’re getting that fee share. And that can be the top-up, if you will, to get somebody comfortable to invest in that manager. I think there are some investors that want a little more demonstrated liquidity in a name that they might buy.

Honestly, sometimes we’ve discovered managers that they’re not spectacular, they’re not bad, they’re a little more middle of the road, but honestly, they might have a single investor or maybe even a program equity investment opportunity just by virtue of an institutional relationship. Their firm is doing a bunch with the manager firms and so they want to find a way to connect in other areas. Firm A likes CLO Equity as an asset class so, “Hey, let’s figure out if we can do something with that manager.” It’s kind of all over the map. I’m not sure there’s any one right way, but never ceases to amaze me. Just think about these volumes in the equity that is required to get that volume done. A lot of managers have captive equity and so they’re taking their own equity and there might be slightly different reasons why those managers therefore are getting deals done, but there are a bunch of managers that need equity and yet this market keeps going.

I feel like I so often hear from the equity investor community, “Eh, the arb is not working.” How many times, Shiloh, have you heard that? Over the last 15
years, I got to be honest, I feel like that’s all I hear.

Shiloh Bates:

Well, nobody was saying that in 2021, to be fair.

Brad Larson:

That’s true. Late ’20, early ’21, that was a very special timeframe.

Shiloh Bates:

Bring that back.

Brad Larson:

But most of the market has not been that over the last 15 years, and yet all these deals get done. It’s a couple of things. First of all, obviously there are other economics involved, whether it’s fee share, whether it’s a portion of maybe warehouse fees or returns that are being contributed. There are a bunch of levers to pull to get a deal done. And the second point I was going to make is back to my original belief about the CLO market. So many parties want to see this market continue.
That’s another reason why I think stuff gets done. And I think banks are sort
of incentivized to keep their warehouse book moving. They don’t want that book building and sitting there for too long. So they’re incentivized maybe to cut fee to get something done. As you know, oftentimes managers aren’t earning a fee during the warehouse period, so they’re incentivized to get a deal done. Your investor base, they want to get stuff done too. They’ve got capital allocated to this strategy. They want to get stuff done. Obviously it’s got to be on a return profile they’ve raised money for, but at the end of the day, they’re incentivized to get stuff done too. So it goes back to my original thesis about why the CLO market was going to come back. You got a bunch of parties that want to see this market continue.

Shiloh Bates:

So one story on the manager selection is that since I’ve been investing in CLO equity, I’ve been a public filer, meaning all of my holdings end up filed with Edgar, the SEC site quarterly. So, what I own is definitely not a secret. And once a CLO manager that I hadn’t spoken with recently saw that I had bought one of their bonds, they’re like, “Oh, you own equity in one of our deals.” The
implication of that was that we thought of them as one of the best CLO managers out there. But it’s like, actually, well, no, we just bought that in the
secondary and it was super cheap. And that’s how it ended up in our book. It
wasn’t exactly the compliment that the manager was hoping for in that case.

Brad Larson:

That was my point about, secondary guys can be a little more agnostic and just pick something up cheap. 

Shiloh Bates:

So, this year you
mentioned it’s going to be either the top year for new CLO creation or tied
versus last year. What are the key drivers there, do you think? Is it CLO
historical performance? And there’s just a lot of money looking for a home
across all asset classes and we’re getting our proportionate cut of that. Or is
there anything unique to our market that’s driving this issuance, do you think?

Brad Larson:

Well, you need demand
across the board. I probably would be remiss without talking about some of the ETFs that have been formed over the last couple of years. The two hardest parts of the capital structure to place tend to be the equity in the AAA. There’s been good AAA demand, and that’s been somewhat driven by the ETFs, for sure. The equity demand that we’ve already touched upon. It’s an asset class that has performed. People invest in CLO primary when the returns in this structured product are attractive, at least if not more attractive than other similar asset classes so that there’s just better relative value in the CLO space. Obviously, they compare primary to secondary as well. When secondary is trading cheap, it’s a little harder to get primary done effectively on the debt and vice versa. When secondary’s gotten a low rich, people move to primary. I think what drives it underlying credits, we’ve seen a little more downgrades this year, but default rates have remained in check. And bear in mind that the loan market default rates that you see aren’t going to be the default rates you’re seeing in CLOs because CLOs are actively managed and should outperform the broader market. So, you have an underlying fundamental credit environment that’s supportive. You have an asset class that’s performed. You have an asset class that, on a relative value basis, continues to look attractive to people. You have managers that want to be building AUM. I want to build AUM, so I want to get this deal done. I’ll cut some fees. Let’s keep this thing moving. You have banks that want to keep their book moving. Again, you have all parties wanting to see this machine continue, but at the end of the day, you have an asset class that’s performed.

You have a credit environment that remains solid in ’25. It feels like it’s going to continue to be solid into ’26 because you have an expectation for rates to be a little lower the next year. I mean, we’ll see how that plays out. But I think the consensus is you’ll probably see another rate cut or two in ’26. You have an administration that’s going to be supportive to M&A activity generally, probably a looser regulatory environment. That should be a tailwind for CLOs heading into ’26. You just have a lot of micro and macro effects supporting the CLO market continuing to issue.

Shiloh Bates:

So, we work in a market
that’s private in a lot of ways. I’m wondering, of the CLOs that were created
this year, is your guess that the substantial majority of those had equity that
just came from the manager in some dedicated fund for their CLO platform rather than true third party equity investors like what I’m doing here at Flat Rock?

Brad Larson:

Yeah, it’s a mix. I mean, I would say probably the market is skewed to that captive equity, but it’s not exclusively out there in the market. I don’t have a great guess at what percentage. Based on our specific observation, yes, I think it’s more captive equity than third party through true third party deal specific raised equity. But those situations definitely still exist. I mean, we’ve done several deals this year where it was a manager bringing 51% of the equity. We had to get 49 done. Or it was a manager who was willing to take all the equity, but hey, they wanted to see if there would be demand for the equity in the deal. And so the team got out there and tried to raise some equity and lo and behold, they actually ended up raising it all or a majority. So, clearly the latter still exists. You still have deals that need to raise third party equity. From a manager perspective, anytime you can approach a deal, having the ability to take all the equity so you’re not forced to sell down, that just obviously changes the power dynamics in that negotiation to some extent, but both types of deals are still getting done.

Shiloh Bates:

So you mentioned that at CIBC that you have responsibilities now above and beyond CLOs. What else are you working on?

Brad Larson: 

Yeah, I’m glad you brought that up. I feel like I need to give Gabby a bit of a shout-out. Gabby Garcia now runs the new CLO business at CIBC. My role is now I run what’s known as global credit financing here at CIBC. Obviously, GCF is the acronym. GCF spans ABS, CLOs, residential credit, commercial real estate credit, private credit, and then we have a repo-financing business as well. So, it’s the full structured product suite. When I joined back in June of ’23, we were pretty regular, active financing bank in ABS. We did some CLO financing, both in mainly warehouse, I guess. We did some repo financing on CLOs back then. We did some private credit financing mainly in CLOs and private credit. It was really as a financing syndicate partner. So, we were a syndicate partner to other third party bank-led bilateral facilities, whether it was a BSL CLO facility or a private credit facility.

What we’ve built out here at CIBC is a little more of a pure play origination component to that. Certainly we’ve added some structurers across
these different business verticals so that we can take that financing from its
financing state to a securitization market term out transaction. I think what
we talk about here a lot is across the verticals, we want to finance it, we
want to structure it, we want to syndicate it, and ultimately we want to
securitize it and trade it. And then that’s the life cycle across the
verticals. But as I mentioned earlier, obviously CLOs will always remain near
and dear to my heart. 

Shiloh Bates:

Sounds good. Is there anything topical that we haven’t touched on?

Brad Larson:

We covered a lot. I think it’s going to be a really interesting 2026. It feels like we enter the year with a lot of tailwinds. I was saying this honestly earlier on a call. It always makes me nervous. When you kind of enter a year that feels like it’s meant to be as strong, if not stronger than that previous year. I think just again, focusing a little more on CLOs, the CLO market. Last year it was I think $201 billion across BSL and middle market or private credit CLOs. This year it’s going to be, I think we’re at 204 and change. I’m sure we’ll probably see a few more deals get done this year. So whatever, call it $205 plus billion. I saw one bank a week or two ago with their ’26 estimate for CLOs at $215 billion. Anytime we enter a year again with estimates exceeding that prior year, I do get a little nervous.

You never know what’s going to happen. And so we have to be positioned as a business across the verticals to lean into that potential growth projections. But at the same time, I think it’s prudent to be prepped for sort of a what if the market isn’t quite as open as we think. And so we’ve always, historically, have always tried to go into a year prep for growth, but protected for the what if.

Shiloh Bates:

Well, I think one challenge for next year is just going to be that CLO equity this year, 2025, did not have a good return. So it’s maybe flat or negative. I guess it depends on who you ask and what you own. But, the reality is the loss rate on loans is elevated at a time where loans are also repricing tighter, and that’s put a lot of pressure on returns. And each time a CLO forms, that’s the first thing you need. Without equity, there’s really nothing to talk about. So we’ll see if bankers like yourself or your team there can put together profitable transactions that people want to sign up for.

Brad Larson:

That’s absolutely right. Obviously, equity’s had a bit of a challenging year in ’25. I think with some of these early calls in the market for loan issuance to be up, I guess somebody saying loan issuance was going to be double what it was this year. That’s obviously helpful if it’s true new issue, because one of the issues, to your point, you have had the issuance this come out, you’ve had stuff repricing tighter. Obviously, I think that we’ll still see some of that, but if you have more pure new issue, you’ll have more new issue paper coming out with some OID that’s helpful to the CLO market. New issuance should take some pressure off the secondary market, should be helpful too from a price perspective. Still might see a little bit of downward pressure on loan spreads, but I’m hopeful that some new issuance will actually be a little more of a green shoot for new issuance in ’26.

But it’s funny for me to say it that way because obviously we’re coming off of a record year.

Shiloh Bates:

My hope is that there’s more loan issuance and that pushes loan spreads wider or at least the refinancing of loans should decrease. And then hopefully with a lower base rate, we’ll just see less loan defaults and more stable year for CLO equity. My closing question is always describe a CLO in 30 seconds.

Brad Larson:

A CLO is a loan fund with leverage, with active management.

Shiloh Bates:

Got it. Okay. That’s what it is. Good stuff. Well, Brad, thanks so much for coming on the podcast. Enjoyed it and good to see you.

Brad Larson:

Yeah, this was great. Thanks, Shiloh. Happy holidays.

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 are 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.