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Excellent Presentation on Collateralized Loan Obligations

Here is a link to a You Tube discussion/presentation from Tom Majewski who is a founder/CEO of Eagle Point Credit (ECC) and Eagle Point Income Fund (EIC) which is presented in a way that makes these CLOs (collateralized loan obligations) much more understandable.

The video is over an hour long, but well worth it in my opinion for those that dabble in preferreds and baby bonds from one of the related companies.

23 thoughts on “Excellent Presentation on Collateralized Loan Obligations”

  1. I watched this vid when it first came out and it really helped me understand the CLO asset class, particularly the control that comes from CLO equity ownership. For those that haven’t watched it, it’s definitely worth your time and effort to watch it.

  2. Charles – I am not sure what your point is. Are you against all BDCs? Certain ones? Those that are just CLO focused?

    As in any investment, there is risk. And each entity stands on it’s own -not as a collective. There are very good BDCs and some less good / more risky.

    I have owned the common stock of ARCC since 2012 (all dividends reinvested – total return 290%), of MAIN (probably as long but I have sold some over the years because it grew much more than a full position – still have a full position – total return of 373%, of TSLX since 2018 – total return 151%) and of OBDC since 2022 – total return of 55% (and I sold some to buy sister company OBDE in February.

    My point being – do your research at the company level and don’t dismiss BDCs out of hand because of some article you try to extrapolate to the whole sector

    1. Mav, I am not dismissing them out of hand. I just don’t own the common.
      Barings bond 2/20/24 99.8
      New mt bond 2/23/24 98.2
      EICC BB 4/15/24 24.68
      MFICL BB 12/20/23 25.09, 12/20/23-25.10, 02/01/24 – 25.16
      CGBDL BB 11/28/23 25.20
      CSWCZ BB 10/20/23 24.79
      EICB BB 10/17/23-24.65, 01/29/24-24.98, 02/27/24-25.02
      GAM PRB 02/09/24 24.49
      GDV PRH 10/28/22 22.45
      NMFCZ BB 04/05/24 – 25.59, 05/13/24- 25.30
      TY PR 10/21/24 4 tranches 45.20 to 45.45

      1. personally, I feel more comfortable holding BDC bonds/notes (in general), than regional/smaller bank preferreds

        liability structures are better (can’t make a run on a bdc overnight) and the leverage is way lower (probably closer to 1-1.25x)… also they are not non-cumulative

        again, the biggest plus for me is some nonsense fear mongering on twitter can’t turn into a failed BDC, like it can a failed bank… so, I feel if I pay attention (which I do) if I become uncomfortable in a bdc bond (although none have ever failed) I can likely move out of it before I wake up down 50% like in some of these bank preferreds when the fear spreads overnight that your deposits might be at risk

        just my 2c… and talking my book as I own almost no bank preferreds and lots of BDC notes/bonds

        1. All this fear-mongering over small banks is getting to be a bit much. There have been 5 banks that failed in the last 15 months, out of over 4,000 banks nationwide. Some of these banks have been around for 100 years and have lasted through all kinds of economic and market cycles and debacles. The ones that got into trouble were terribly mismanaged amid a disastrous ZIRP policy which was followed up by rapidly rising rates (thanks Federal Reserve).

          BDC didn’t come to light until the 70s/80s and there are only 84 around today, with only 57 or so being public. So they have not been around in all market and economic cycles. And while they aren’t levered as banks, they have to borrow at market rates or issue equity if they need capital. There is a reason you get an 8+ percent dividend from the BDCs.

      2. Fair enough. Depends on one’s risk profile, etc

        But as one who likes a mix of some common (BDC, MLPs and other Dividend payers) with my preferreds, I have found you can find excellent performers with the BDC common as my experience has shown

        I do own several BDC baby bonds as well. As Z noted, to me they are less risky than small bank preferreds

        That said, on your list – you are conflating Closed End Funds – CLOs, and closed end funds – stocks with BDCs. They are different types of entities and should not be lumped into the same pool.

        1. True Mavrick, I just hold them in my mind separate from my Ute, Insurance, trust, MLP, yes my bank preferreds, and the few common stocks I hold.
          I keep looking at M-REIT preferred and still haven’t decided if I want to hold any of those yet.

  3. Thanks, that was indeed a good video. I certainly came away from it with a very positive impression of Majewski and Eagle Point. The main thing I learned was that the “equity tranche” in CLO’s gives rather surprising voting rights to the holders, and that ECC holds a voting majority in many of their positions. This would seem to give them an awful big advantage. He talks about this starting 50:28.

    There was one place were I could have used more detail. At 57:26 he talks about a variety of “bona fide competitors” who they hold in high regard, as opposed to “a laundry list of transient competitors” who one should avoid. I don’t know enough about the industry to parse this properly. Can anyone fill in names?

    1. Nate, I am no expert but here is a link I have posted before as a place to start.
      I love charts, as they are a good place to start for comparing companies.
      Of course, past performance is just a collection of information and not a predictor of future performance.
      The good thing is the author just published an updated chart that you can use to compare recent performance.
      Be aware some of the managers of these BDC’s as an example would be Gabelli, manage multiple BDC’s and they will invest in the same holdings among them so you could end up with greater exposure than you think you have.
      The comfort of knowing they are required to have a 200% asset coverage could be an illusion. I am sure if they do fall below that requirement they have some time to make up the deficiency but in a quick moving market time can be an enemy. In a panicked market, selling assets or common shares may be difficult. As a last resort they can always do a reverse stock split I suppose.
      A well respected writer over on SA said no BDC has failed and that rubbed me the wrong way as it reminded me that was what was said about mortgage backed bonds until the 2007 – 2008 crash. Why I invest in the preferred, they offer a little more layer of safety but less return.

      1. Here is a bit of history on one BDC that came close to failing, but was eventually purchased by Ares Capital (ARCC). Owned a handful of shares of this company in the late 1990’s through the early 2000’s. The table at the end of the article is illustrative of the volatility in the earnings this BDC. And I do not know of any reason to believe this level volatility, overtime will not be experienced in the current brood of BDCs or CEFs invested in CLOs. I am with Charles, and now like to stay higher in the capital stack of BDCs/CLOs, investing in either their term preferreds or unsecured bonds.


      2. Charles – sadly I dont have a SA account so I can’t read article. I did see the headline concerning BDCs and Saratoga.

        Totally agree on the preference for preferred stock and notes common. I woudld not touch the common in any of this stuff.

        1. August and Old guy, Thanks for the input. I know nothings, just what I get from reading. I have noticed on Quantum once or twice history notes of a couple doing reverse stock splits or merging together. We all take a little risk, I just bought NMFCZ last couple days and am down 5 or 10 cents. I also own several more preferred and BB of the CEF and BDC’s
          My comment and yours I am sure was for helping other people understand the risks.
          Unlike banks and brokerages that have insurance with FDIC, FINRA or the Feds willing to step in, there is no backstops for BDC’s so never say never that none have failed.

          1. Hey Charles – seems like a bold claim about BDCs… Would be interesting to research if any have ever gone B/K. Maybe there is something to it?

            1. The claim is true August, none have gone BK. But I would say from reading this.
              That I wonder how many investors would be on Mr Toad’s wild ride until the end of the tunnel without bailing?
              I know others here have gotten on after hearing that some company that had suspended dividends was going to start repayment , but how many of us would have the fortitude to stay on for the whole ride? Dead money, sell at a loss, no income or reduced income for however long it takes for a recovery?
              Don’t think there is anything wrong with saying be aware of what is going on.

                1. Like a Phoenix rising from the ashes. From Quantumonline.

                  Notes: July 13, 2020 — Medley Capital Corporation (NYSE: MCC) (TASE: MCC) (the “Company”) announced today that, following the Company’s 2020 Annual Meeting of Stockholders held on June 30, 2020 (the “Annual Meeting”), on July 7, 2020, the Company’s board of directors (the “Board”) determined that it is in the best interests of the Company and its stockholders to effect a reverse stock split of its common stock, par value $0.001 (the “Common Stock”), of 1-20 (the “Reverse Stock Split”) and reduce the number of authorized shares of Common stock by the reverse stock split ratio (the “Authorized Share Reduction”). Accordingly, on July 13, 2020, the Company filed a Certificate of Amendment (the “Certificate of Amendment”) to the Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the Reverse Stock Split and the Authorized Share Reduction, which will be effective at 5:00 p.m., Eastern Time, on July 24, 2020 (the “Effective Time”).
                  May 10, 2019 — Medley Capital Corporation (NYSE: MCC) today announced financial results for its second fiscal quarter ended

                  March 31, 2019. Dividend Declaration. The board of directors did not declare a dividend this quarter.

                  1. Ahhhhhhhh, yes, the fabulous Taube Brothers – two of the Ivy League’s finest. I watched this soap opera for years – it was actually more like passing by a car wreck on the road and not being able to turn your head away…These two were amazingly brazen in their self dealing decisions that ironically always seemed to benefit them to the detriment of the share holders…. https://archive.ph/lDRv6 or https://www.sec.gov/files/litigation/admin/2022/33-11057.pdf…. I think even the folks at WHLR probably looked up to them as roll models

    2. Hi Nathan,

      Equity is just that – equity – so it has the voting power to manage the CLO. The “virtual bank” model used in the video is helpful.

      In general I have a strong preference for leveraged bank loans in this environment – that is a personal bias FWIW – so to me CLOs based on this type of asset are preferable to other assets. This is discussed in the video.

      I have encountered academic papers which say that CLO equity gets high abnormal returns and this voting may be one of the reasons for this.

      As far as competitors – there are a few discussed on this board – Oxford Lane is one and Carlisle is another. These are CEF funds which invest in CLO equity and issue term preferred stock. I consider such term preferred stock to be similar to preferred stock in a fund of regional bank stocks (equities).

      Some key differentiationg factors might be:
      1)CEF investing in CLO equity primarily with some CLO debt.
      2)The CLOs are based on syndicated leveraged bank loans not other loans. This rules out mREITS, BDCs etc as competitors. They are different.
      3)These CEFs are public and follow the rules of the 1940 Act big advantages IMO.
      4)All CEF fund level debt instruments are long term (not repo eg) minimize liquidity risk events.
      5)These CEFs issue term preferred stock which is publicly traded. Personally, I think this is the sweet spot in the captial structure. Note these preferred stocks may have protective manditory call provisions (based on coverage ratios) which I have not been able to find for the baby bonds in the same funds. Maybe it helps, maybe not, but I like it.

      When you define the landscape like this there are not many competitors, and I think Tim has them all listed from what I can tell.

  4. Just proves that there’s so much going on under the cover as to make evaluations not only difficult, but to impossible! Which is why its best to steer clear of operators with checkered histories!

  5. Yes!

    This particular video shaped a lot of my thinking. Well worth the effort.

    Note there are also CRE CLOs these are not discussed here at all but are highly relevant to ABR and other mREITS.

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