Macro Hive Conversations With Bilal Hafeez
Shiloh Bates on Demystifying CLO Myths
Dec 8, 2023
Shiloh Bates, CIO of Flat Rock Global, discusses everything about CLOs, from definitions to their performance. He shares his career journey, explains cash flow in bankruptcy, and differentiates CLOs from HY bonds. Bates also talks about writing a book on CLO investing and the benefits of reading practitioner-authored books.
41:04
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Quick takeaways
- CLO equity tranches, particularly double B notes, offer higher returns with higher risk compared to other asset classes.
- Prioritizing diversification and thorough due diligence are key to successful investments.
Deep dives
CLOs and the Self-Healing Mechanism
CLOs, or collateralized loan obligations, are a type of investment that functions like a simplified bank. They consist of senior-secured loans to US businesses, created in leveraged buyouts. The loans are floating rate and are financed by issuing long-term debt with different ratings. CLO equity tranches, particularly double B notes, offer higher returns with higher risk compared to other asset classes. What sets CLOs apart is their self-healing mechanism, where loans that default are balanced by discounted loans that are constantly bought into the CLO. Despite the negative impact of events like the global financial crisis and COVID-19, CLO equity has shown resilience, offering investors favorable returns.
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