Understanding Collateralized Loan Obligations with Expert Shiloh Bates

Unlock the secrets of Collateralized Loan Obligations (CLOs) with industry expert Shiloh Bates from Flat Rock Global. Shiloh, boasting over 20 years of experience, simplifies the complexities of CLOs, comparing them to mini-banks with diversified portfolios of first lien senior secured loans. Learn about the intricate structure of CLOs, from AAA tranches to the high-yield equity tranches, and discover why CLO equity attracts investors with its high profitability and cash flow potential. Shiloh also provides a thorough analysis of the risks and historical performance of CLOs, offering a compelling perspective on the future of this asset class.

In our conversation, we dive deep into what sets CLO equity investments apart from traditional bonds. Shiloh highlights the advantages of CLOs, such as their low loan-to-value ratios and the importance of diversification across sectors like healthcare, technology, and business services. Hear insights from past economic downturns, and understand why CLOs often outperform high-yield bonds with their secured nature and higher yields. Shiloh explains the lower default rates and greater recovery prospects that make CLOs an enticing alternative, especially in the current economic landscape.

Prepare for an eye-opening exploration of CLO portfolio management and market resilience. Shiloh discusses the critical roles of portfolio managers and their relationships with investment banks, ensuring lucrative opportunities. Learn how CLOs have stood strong during financial crises, including the 2007-2008 meltdown, and understand their structural advantages. Finally, get a sneak peek into Shiloh's comprehensive book on CLO investing, a must-read for anyone keen to deepen their understanding of this potent financial instrument. Don't miss out on this wealth of knowledge from one of the leading experts in the field.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Transcript

Speaker 1: 0:08

My name is Michael Guyatt, publisher of the Lead Lag Report. Joining me at the rough hour is Shiloh Bates of Flat Rock Global. Shiloh, introduce yourself to the audience and to me a little bit more formally. Who are you, what's your background, what have you done throughout your career and what are you doing currently?

Speaker 2: 0:25

done throughout your career and what are you doing currently? Sure, well, great to be with you today here. So I've spent about 20 plus years in the CLO industry so CLO stands for Collateralized Loan Obligations and I started my career as an investment banker. I did that for two years and then I transitioned to the buy side where for 10 years I was investing. I was working for CLO managers and I was buying, investing in the loans that go into CLOs, and then for the last decade plus, I've been investing in CLO securities, so particularly the CLO equity tranche and the CLO BB. So I've spent almost my entire career in the CLO space.

Speaker 2: 1:11

Last year I published a book on CLO investing. It's called what's called that CLO investing, with the emphasis on CLO equity and BB notes. That's what we focus on at Flat Rock, where I am the chief investment officer. We manage about a billion dollars in CLO securities and we think the outlook for our asset class is pretty compelling at the moment. The book I wrote, by the way, is for investors who just want to know more about the CLO asset class, so there's no particular loan or bond or structured finance experience to get through the book. It's just 220 pages, written for anybody who has some kind of expertise or some financial wherewithal should be able to get through it pretty easily, I think.

Speaker 1: 2:09

All right. So there's a number of keywords I want to have you define. First of all, because I hear collateralized loan obligations and then I hear equity, and those words collateralized and loan and obligation all might be confusing to most people that just know about stocks. So let's start basic what is a CLO? And then explain what a CLO equity is.

Speaker 2: 2:31

Sure, so the way to think about a CLO is that it's really a simplified bank. So the bank has 500 million of assets in it and the assets are going to be a diversified portfolio assets in it and the assets are going to be a diversified portfolio of first lien senior secured loans. There might be 200 plus of these loans in the CLO and these loans are created in leveraged buyouts. So imagine Aries, apollo, kkr. They're buying a company, say the enterprise value is a billion. They might finance half the purchase price with equity from the private equity firm and the remainder may come in a first lien term loan. And so the attraction of doing the term loan from the perspective of private equity is that it's just a way for them to leverage their investment. So the private equity firm believes that the business that it's buying will be able to grow revenue and profits over time, so they want to lever that investment. And then, from the perspective of the first lien term loan, this is a loan that today might pay. They're going to be floating rate, so it's three months, so for plus maybe 350, uh basis points, uh or thereabouts. So we're talking about 9% is kind of the the yield uh on on a lot of these loans. And then the loan is secured by all the assets of the company. Uh and so, like in my uh example, as long as the enterprise value of the business doesn't decline by half during that business's life, then the first lien lender is going to get repaid at the end of the day. So how we you know, if you look back over call it 30 years, the track record for these leverage loans is pretty favorable. The track record for these leverage loans is pretty favorable. So, like, by our math, there's about a 2% default rate in CLOs. The recovery rate on loans historically has been about 70 cents on the dollar and what we've seen over the last two and change years is that because the floating rate, because the Fed is hiked so much, the floating rate three months so far is high. It's at 5.4%, and that means that we're receiving a lot of income on these loans that maybe we would not have expected to receive. So we've benefited from the higher Fed funds rate which translates into higher three months so far. So those are the assets of the CLO. So, again, there's 200 of the loans that I just described. And then the CLO finances itself by issuing different securities. We call them tranches to sound sophisticated and basically there's a AAA that finances this loan pool and there's a AA and kind of down the stack until you get to securities that we focus on. So we're focused on the double B note, which is usually the junior, most debt security issued by the CLO, and then the CLO equity sits at the bottom. And so if you're an investor in CLO equity, how you think about that is that the interest rate that you earn on the CLO's assets is much higher than the CLO's financing cost, and so that creates profitability that's distributed to the CLO equity investors quarterly and so the profitability of the CLO creates high cash flows to the equity.

Speaker 2: 6:14

And then the risk that you're taking is that loans default and there's loan losses in the CLO. If and when that happens, those are losses that are borne by the equity, but fortunately it's not a kind of unquantifiable risk. Basically we can look back over the last 30 years. We see it as roughly a 60 basis point loss rate on the loans. And so when you buy a CLO equity piece you never assume that you're going to go the CLO manager is going to go 100 or 200 for 200 on the loans. These loans are single B rated on average. They're not investment grade, and so there are going to be some defaults, and you budget for that using this 60 basis point loss rate and, net of the loss rate, you're still targeting returns of the mid to high teens, and so that's how I would describe CLO equity in a nutshell.

Speaker 2: 7:15

And then the double B security, which is something that we also focus on. It's a little bit simpler. It's just, you know, it's just a debt instrument. The rate today is around three months, so for plus 600 basis points or a little bit inside of that, and that gets paid its interest. After the, the other debt that's more senior to the double B gets paid its interest, its interest, and so the CLO that I described might have a life of, could go as long as maybe nine years. But again, the analogy, the best analogy to think about this, is just a simplified bank. So if you buy stock today in like a JP Morgan or a Bank of America, they're in 30 different business lines. They're still paying legal settlements from their misdeeds of the past. In a CLO, it's just a portfolio of loans financed at a low cost with the profitability flowing through to the equity.

Speaker 1: 8:20

It sounds to me like the last three years were almost the perfect backdrop. These didn't really have credit spreads widened at all. It's purely about interest rates. Anything that was variable did well without the commensurate default risk that normally you might otherwise see in something that was as fast as it was. Talk through different interest rate cycles and credit cycles, how, in general, the asset class tends to behave.

Speaker 2: 8:50

Yeah, sure. So the interest rate increases were beneficial to us really since 2022. Now, although the base rate went up for CLO equity, it actually did trade down during the year, and the reason for that was at the end of 2021, we were targeting around a 15% return on our investments, and then in 2022, risk premiums for all asset classes went up and so did the risk of a sharp recession. That never showed up, but during 2022 and the beginning of 2023, people were looking at equity and saying, okay, I'm not targeting 15% anymore, I'm targeting very high teens, and because of that, owners of CLO equity needed to write down the fair market value of their investments. But the sharp downturn in the economy did not materialize and we've benefited from the higher base rate, and so those CLO equity securities really have been coming back. They haven't fully retraced the drawdown of 2022, but we're certainly heading in the right direction.

Speaker 2: 10:09

The loans in CLOs they do start their lives with a 50% or less loan to value, and so, as a result, we're not so sensitive to the overall kind of growth rate of the economy. So, whether the economy grows 2% or 3% or if it shrinks one, these are very relevant numbers if you're investing in, like common stocks or the S&P 500, for example. But as a lender and that's what the CLO is basically a lender, even if a business is acquired and revenue and cashflow never grow during, you know, call it the six year life of the term loan, um, you know, even in that case, as a lender you're probably fine with it. I mean, you're you're going to deleverage. You know, deleverage slowly over time.

Speaker 2: 10:59

Um, in fact, when the business does very, very well, uh, what happens from the perspective of a lender is just that you get paid, repaid very quickly and you did a bunch of work and due diligence on a company and now it's, you know, refinanced itself at a lower rate. You know, potentially with, with a different group of lenders and so like. For us, really kind of the risks on the underlying loans are that some kind of you know that there's regulatory changes or technological changes or losses at big customers. These are things that you know. Maybe specific, to be specific to just one company in a CLO or to one particular industry. We're really just focused on cases where the performance of the borrower, the wheels, come off the cart, if you will, but the overall growth rate of the economy within some bounds isn't really a big driver of the results we're going to get from our CLO equity pieces.

Speaker 1: 12:40

Are there? You mentioned, leveraged buyouts? Are there certain sectors that tend to dominate the asset class?

Speaker 2: 12:48

Sure. So the biggest industries in in a CLO are going to be uh, there's three of them. So healthcare, uh, is one, uh, business services is another and technology is a third. So when I go through all these um, so in healthcare, uh, usually you know this might be 11% or so of the portfolio. What you're going to find in there are very diversified business models.

Speaker 2: 13:18

So it's not healthcare where there's one risk to all 10% or 11% of the portfolio. What you'll actually see is it's 10% and it's hospitals and it's drugs and it's devices, maybe billing. There's not one thing that would happen in the economy or to these businesses where all 10% or 11% would be at risk. And then technology, which is kind of a similar amount of the CLOs AUM that's going to be. It was not not a couple of guys in a garage launching a product. This is, you know, enterprise software, where you have businesses with 500 million plus revenue, where they're really kind of entrenched with their customers would be very hard to replace the software.

Speaker 2: 14:15

And then business services is also like a 10, 10 to 11% of of a typical CLO and basically business services is just a catch-all for basically the CLO manager saying we couldn't find of the 32 other you know potential industries that could be assigned to. You know we couldn't find one, so we we called it business services and that's kind of the catch-all. So I think there's not. So the point of this is that basically, you know the CLO is going to have 200 different borrowers in there. It's going to be diversified by industry.

Speaker 2: 14:51

If I went back in time in 2015, I think CLO managers did learn a lesson, a hard one, and that was just that back then the typical CLO portfolio might've had. Four or 5% of the loans were to oil and gas companies, where you know the results there were totally tied to a commodity price at the end of the day. So in that case there was one risk and you know we were in a downside case in 2015 and 2016,. A lot of those loans traded down pretty substantially during the time and as a result, I think our CLO managers today are very they don't do a lot of energy loans one, but they're hyper-focused on not having any risk that could kind of be present in more than one or two or maybe three different loans, or maybe three different loans.

Speaker 1: 15:52

The question that comes to mind for me is why bother with bonds at all if that's the case I mean, aside from the fixed versus variable aspect of it CLOs have generally higher yields, right and they're secure, and largely most people don't know about them, which to me is attractive, because it probably means there's more undervaluation.

Speaker 2: 16:17

So why even consider traditional bonds at all? Yeah, so our funds basically, people are allocating to, especially to our BB Focus Fund, really as an alternative to high yield, and we think it's a much more interesting way to play the credit markets than high yield. So if you're investing in a portfolio of high yield bonds, one, you're placing a bet on interest rates, whether you want to or not, and from here the expectation is the Fed is going to cut, but we don't know. That's been the expectation for a long time. And then if you look at default rates for high yield bonds, for example, over the last 30 years, high yield defaults at about a 3% rate and when there is a default, the high yield bond is generally unsecured. Um, so an unsecured bond is just basically an IOU from the company. It's a, it's a promise to pay, but there's no specific collateral backing, uh, backing the claim. And so if there's a first lien term loan, for example, at the company that's going to be ahead, that's going to get the first recovery, uh, bond would come second. So the recoveries there are kind of in the high 30s looking back over the last 30 years. And so in a double B corporate you can always have defaults. So the defaults again are driven by anything kind of negative and idiosyncratic happening at the company.

Speaker 2: 17:57

But for CLO securities and I'll talk about the double B, since that's the junior most debt tranche If you look back over the last 30 years, the default rate is about 25 basis points, and so it's a small fraction of the default rate or a loss rate in high yield.

Speaker 2: 18:25

And the reason for that is that if you invest in the CLO double B, you're benefiting from the first loss equity that's contributed to the CLO on day one. And so when loans, from the perspective of a double B investor, when loans in the CLO are defaulting, that's really a risk for the equity investor, not for you. And so over time over this 30 years, the default rate on these double Bs has been de minimis. And then today, because of the higher base rate they pay, depending on the structure of the BB, it's 6% over three months so far. So that's about 11.5% yield, about 11.5% yield, and our view is, if you can make 11.5% and the historical default rate is de minimis for these securities and there's been a lot of them issued we think that that's really compelling and that's why CLOs do make it into the news. There's a lot more stories now on Bloomberg or the journal where people are interested in the asset class and basically that's the reason attractive risk-adjusted returns.

Speaker 1: 19:43

Such on liquidity right. I know there are a number of ETFs out there that also try to do CLO investing, but when you have a real dislocation or volatility scale, do you get the same kind of mispricing in CLOs like you would in the high yield illiquid junk bond space?

Speaker 2: 20:10

Yeah. So I think there's lots of opportunities in a down market and you know, kind of one of the barriers to the asset class for investing in CLOs is that you know, basically there's four concepts in CLOs and happy to go through them. But that makes CLOs a little bit more complicated than owning like a high yield bond, for example. So, like CLOs are, they're only sold to, usually just sold to, you know, qualified institutional buyers. Clos are modeled in software called Intex that's widely used by market participants and investing in CLOs without that software, you know, could be challenging. Investing in CLOs without that software could be challenging, I think, for a lot of people.

Speaker 2: 21:07

And so we're earning what I think is a complexity premium for understanding an at scale which I think we are at, flat Rock, the individual, the full tranches of the CLO securities that we're buying.

Speaker 2: 21:21

They might be, in the case of an equity tranche it might be 50 million, in the case of a double B it might be 30 million, and when these securities are created, an investment bank is going to the market to try to find the best buyer and so because of the size, the total sizes of these investments, the investment banks can't go to the entire world. You can't show 100 people a 70 million opportunity because if everybody said yes, they like it, well, there's not going to be enough paper to go around. And so, kind of like, structurally, how my market works in terms of the process of buying securities is that the investment banks just go to the guys who they think will be the best buyers, guys that they already have relations, relationships with, and so it makes it harder as a um, as a newer participant or less experienced one uh, to come into the market and uh and be effective. Into the market and be effective.

Speaker 1: 22:34

The high yield part of the marketplace I often put a spotlight on in my own research, largely because I can't quite wrap my head around small cap stocks not doing anywhere near as well as large caps have, which suggests to me that there's refinancing risk concerns which are holding back that part of the equity space versus credit spreads which are saying there's no default risk at all. This has been a big theme of mine for the last year. I can't quite understand the disconnect there. Do you get a sense that the high yield space is properly valued in general? Forget about CLOs for a moment Sort of just the idea of the marketplace thinking default risk is a lot less than maybe it is.

Speaker 2: 23:21

Yeah. So I'm definitely not an expert on high yield bonds, but our view is that what we've kind of seen anecdotally in the numbers and there's an index out there where you can kind of look at the performance of the underlying loans and CLOs and basically what it would show you is that you know the revenue and profitability performance of the loans has been very strong for the last two years and profitability performance of the loans has been very strong for the last two years. And basically we've seen this cycle where the borrowers that we have are doing very well and, as a result, the Fed needs to keep interest rates higher. That's been kind of the feedback loop. I do think here at this point the higher rates may be starting to have more of an effect and we're very cautious.

Speaker 2: 24:14

At Flat Rock we make investments as though a recession is around the corner. That's how we think about our business. I do think things are slowing a little bit. I think the Fed is starting to have the higher rate is starting to have an effect on some businesses. But again, for us, as long as the performance of the company doesn't totally fall out of bed, then as a first lien lender we're in pretty good shape.

Speaker 2: 24:42

And then, if you're talking about high yield specifically, a lot of borrowers actually have both a first lien term loan that might be in a number of CLOs and they also issue high yield bonds. And so it's the same company with two different securities. And when we look at kind of the relative value between owning a first lien loan and a bond, the big message is that because the Fed has hiked so much, you know you can get basically equity like returns from the first lien loan, and so we really just don't see any reason to stretch, um, you know, to high yield to potentially earn a little bit more in terms of income. And it's also the same thing for second lien loans. Um, so, like our strategies at Flyrock are basically first lien exposure strategies, uh and that's it, and um, but again, but again, I'm actually not an expert on the high yield market.

Speaker 1: 26:10

It's a question that somebody asked. I want to show it on the screen from a viewer CLOs are they, like, the next source of a crisis? And I know I'm sure you've heard similar things people that are not involved and I think a lot of that comes from, obviously, the 07, 08 type of type of period, but let's tease that out a little bit, sort of the idea of that as a source of a crisis or not forward to the current period.

Speaker 2: 26:49

So during the financial crisis, clos would have traded down on a mark-to-market basis substantially. But if we're talking about the CLO equity tranche and that's the tranche that takes the most risk in a CLO, one thing that's very surprising to people is that if you would have bought a CLO equity tranche in 2007, so right before the GFC, and you would have held it through its call it a 10-year life, the average IRRs would have been close to 30%. So that's, you know you made 30% every year over 10 years. So that's you know. If you compare that to the performance of CDOs, where the underlying collateral was, you know subprime mortgages of dubious credit quality, you know you saw AAAs, their default, and then, in my little niche, you know, clos, even the equity tranche, did well, and so then, and defaults were really de minimis, you know, kind of like through the capital stack. I mean, I quoted the double B default rate as like 25 bps annually. So CLO securities did really well, and so I guess you know.

Speaker 2: 28:03

The question is why? Well, one is just the quality of the assets in a CLO. So again, first, lien loans to companies that are backed by sophisticated private equity firms with initial loans to value of like 40 to 50%. So that's what we're doing Significantly better collateral than you would have found in the ABS CDOs that defaulted. So another kind of thing to know about CLOs that's really important is just that when you get into recessionary periods, default rates on loans should pick up. That's negative for all the investors in the CLO. But at the same time, clos are reinvesting vehicles. So when the CLO starts its life, it might have a portfolio of 400 or 500 million of loans. Those loans prepay every three to four years, prepay every three to four years, and during the CLO's reinvestment period the CLO manager goes into the market and buys new loans with the proceeds. And so during the GFC, default rates on loans picked up substantially. The default rate peaked at about 8%. So that's very negative for all the CLOs investors. But at the same time, the loan index traded down as well, and so every time a loan prepaid a par, the CLO manager went to the market and they bought a new loan at a discount, and it turns out that a lot more loans prepay a par than ever default. Prepay a par, they never default, and so each time you buy a discounted loan, that's an expected gain in the future, and so the 30% IRRs for the equity. A big driver of that was just that the CLO manager could buy discounted loans with proceeds of the loans that prepaid, discounted the loans with proceeds of the loans that prepaid, and they were able to get actually, instead of having net losses on the loans, they had net gains because of the cheap loans that they bought. So then, since the GFC well, right after the GFC, people were not issuing CLOs. The CLO market really didn't turn back on until 2011.

Speaker 2: 30:29

And now I mentioned before it's like a trillion dollar AUM asset class, and so because our acronym is CLO, it starts with a C, and everybody, a lot of people read and enjoy the Big Short. I certainly did, but what we're doing is our performance has been strong, and so that's why kind of the interest in CLOs today, I think, are a function of good historical performance, and then also the higher base rate kind of helps us out, and then also the higher base rate kind of helps us out. So then is it, are CLOs a source of risk in the economy? So I think not. So the CLO is set up initially with around a 12-year maturity, and so the idea with that maturity is that every loan in the CLO should be repaid by the time the CLO ends its life, and there's no mark to market margining or anything like that in a CLO. So there's no for selling of loans.

Speaker 2: 31:39

In fact, if you're a CLO equity investor, the worst thing that could happen to you is that CLO distributions are missed. So if the CLO underperforms and by that I mean there's too many defaulted loans or loans that traded down or loans that were revalued at or re-rated at triple C or downgraded If you have too many of those then the CLO equity does not get paid and instead the CLO's profitability is used to acquire more, more leverage loans. So there's not any to have kind of like contagion you know or you know you would. There's. There's nothing that would cause you know for selling of loans in CLOs. So another is just that the banking system today is more resilient because of CLOs, and by that what I mean is that the kind of loans that I've been talking about today, historically these were owned in many cases by banks directly, and now what we see is that these loans really are owned in CLOs and maybe some other, like loan mutual funds or ETFs, but banks have largely exited owning these loans.

Speaker 2: 33:02

So they might a Bank of America or JP Morgan might underwrite the loan or arrange it. But they syndicate it to 50 or 100 different accounts and they earn a fee for doing that. But after the syndication process they really don't have much exposure to the loan at all, and from the bank's perspective, the security that's more interesting to them than owning the loan directly is the CLO AAA. So they buy the senior, most tranche of the CLO. They skip investing in the loan directly.

Speaker 2: 33:41

If you invest in CLO AAAs you're going to earn a rate that's lower than the rate you would have earned by owning the loan directly. But the banks are focused on their return on equity and if you have a AAA-rated security there's very little capital you need to set aside for that, and so banks see the more efficient, the more profitable way to invest their dollars is to buy CLO AAAs, and that leaves the exposure of loans to people like me at Flat Rock who want the risk. So our view is that these are high quality loans, that they'll default rarely and that we can make, depending on the security, kind of mid to high teens in the equity tranche and lower returns in the BB. But we're not our investors are signing up to take this risk, and we think it's a good one to take this risk and we think it's a good one.

Speaker 1: 34:47

Once the portfolio is constructed, what does the maintenance look like, in other words, as a portfolio manager.

Speaker 2: 35:00

What is it that's actually being done day to day? Sure, so in our equity fund, for example, we're going to have like 40 different CLO equity tranches that we bought since the fund's inception about six years ago. And basically to be an effective CLO equity investor, you need to look at deals that are called primary deals, where a CLO is being created. You also look at CLOs that trade in the secondary market and you're trying to always determine what's the best risk-adjusted returns among the two.

Speaker 2: 35:38

And then, in terms of maintenance just kind of keeping yourself up to date on the performance of the CLOs they report to you monthly with a trustee report that's 100 pages of information on what's happening with the CLO, what loans have been bought, what tests, how the CLO is performing versus its many tests, and then, four times a year, is performing versus its many tests.

Speaker 2: 36:04

And then four times a year we get a quarterly payment report which again takes all the interest payments from the CLO, allocates it to the owners of different CLO securities and then the remainder, like I've said, is swept to the equity tranche. So that's done every quarter. And then also for me, part of the job is just if you have a lot of data through these trustee reports, but we are in constant contact with the CLO manager about the performance of loans as well. So I should point out, at Flyrock we're not a CLO manager, so each CLO does have a manager. That's the person who picks the initial loan portfolio and keeps the CLO fully invested during the reinvestment period. For us, some of our CLO managers are basically the biggest publicly traded asset management firms. Our CLO managers and our biggest CLO manager across our funds is BlackRock.

Speaker 1: 37:19

Let's touch on the book for a bit as we get close to the top of the hour. It is not easy to write a book, I don't care how long it is. Talk about that, drew. Was that your first book? How challenging was the actual process.

Speaker 2: 37:33

So the genesis of the book is that in 2020, I had some time on my hands and I decided to write just like a 60-page manual on how I approach, uh, clo investing. And uh, there were some other kind of white papers uh out there, um, for CLOs, but they were written from the perspective of, like you know, a lawyer or maybe you know, a different market participant. And so I I had, kind of uniquely, this white space where it's like I don't think anybody's written about our business from the perspective of a CLO equity investor. So I wrote that, we put it on our website and, you know, I was really surprised by how many people read it, and I think it's partially a function of the fact that it's just there's no other resources. There's other resources out there, like if you want to inform yourself on CLOs, you can do a Google search and lots of articles will come up. But you know, this had a lot of information you would want put together in a way where I even had kind of examples. It's like, okay, here's two CLOs and this is where one trades and this is where the other trades. This is where one trades and this is where the other trades, and this is like how, how we would think about the explanation for the difference in price.

Speaker 2: 38:52

And so then I found, you know, clo managers were reading the manual, and so so were my competitors, kind of kind of funnily or kind of funny. And then so then I that gave me the impetus to write the full book, which is 220 pages. And you know, it's not like, you know, if you're writing a novel or something, you know, you sit down and with a blank sheet of paper, and I think that would be very tough to do. But for CLOs, you know, a lot of my time is spent educating people on the asset class. We have a pitch deck that has diagrams of CLOs and how the cash flow is allocated amongst the different investors in CLOs, and so basically a third of the book is just a copy and paste of stuff that I'd already put together at one point. And then I'm constantly doing Q&A with our investors. So a lot of the people who have invested in our funds, they've learned about CLOs through us really. So we've done that, we've done that education, and so a lot of the book just kind of naturally comes together with, you know, things that were already done.

Speaker 2: 40:16

And then I just kind of thought about hey, you know, like, what's the story of of CLOs and how I would kind of how, how I would tell it in a way that makes sense and, um, and so, yeah, so we published it, uh, last year and you know, a lot of people in the industry have told me they read it. I, uh, I don't know, that's that's what they tell me. I don't question it, uh, and so we've, we've, um, yeah, we've, we've, I've had a lot of success with it. And um, um, you know, we've, we've, I've had a lot of success with it and um, it's kind of the only, it's the only book in in CLOs, uh, at the moment.

Speaker 1: 40:52

Uh, charlotte, for those who want to track more of your thoughts and get access to the book. Uh, where would you point them to?

Speaker 2: 40:58

Yeah, sure, so the book is just on, uh, on Amazon, uh, or we're Barnes and Noble and then, um, you know, at Flat Rock, we try to be, you know, a thought leader in CLOs, and so we have like an insights page where we try to write about, or comment about, the material things happening in the market and so, like, just on our website, you can see, you know, what we've found interesting, what we've written about, and it's just, it's public, so anybody can go in there. Uh, we also have a CLO equity index, uh, which is, um, she's also on our website and you can see how CLO equity has performed, uh, on a quarterly basis since 2014.

Speaker 1: 41:46

And we have the only, yeah that's the only CLO equity index as well. Everybody, I encourage you to learn more about CLOs and check out Shiloh's book. Hopefully, maybe consider this educational. Certainly part of the marketplace that most people are not that aware of, but has some really strong risk adjuster returns. So thank you, Shiloh. I appreciate your knowledge here and how you explained everything. Yeah, great to be with you Really enjoyed it. Thank you, buddy Cheers.