British Business Bank buys its first ABS

An interview with Propel and the BBB, a busy Q1 for ABS, more arb headaches for CLO managers

Transcript

SPEAKER_05 0:06

Hello and welcome to another fun mess. I'm George Smith, Global Capital Securitization Editor, and I'm delighted to be joined for today's episode by two very special guests. First, we have Ian Wills from Propel. Hi Ian, and welcome to another fun mess. Thanks, George. Great to be here. And also Mike Stravens from the British Business Bank. Hi Mike.

SPEAKER_02 0:26

Hey, nice to see you too. Nice to speak to you guys too.

SPEAKER_05 0:28

So I'm sure everyone will be wondering kind of what we're all doing here, and we'll get into that in a minute. But first, Ian, maybe you could give us a short introduction to yourself and to Propel.

SPEAKER_01 0:39

Yeah, sure. I'll do that, George. So let's start at the beginning. Um, my name is Ian Wills. I'm head of capital markets for Propel Finance. I've been in the industry now for too many years to remember. Propel is a provider of asset finance to UK SMEs. We operate across multiple channels with uh several different routes to market. We are very much a partner-led lending institution. So we have some relationships with uh a number of very large UK banks and other global um companies, uh, as well as the more traditional routes to market through the UK broker network, where we have relationships with a number of the larger brokers in the UK and also through the tech vendor channel, where we originate into um various operators who provide businesses with uh technology equipment. Maybe if I could just expand, George sorry, a little on the partner side. So we have uh relationships with Barclays in the UK um offering their customers asset finance. We've recently launched something very similar with Santander and about six months ago expanded to offer embedded finance to B2B customers, which is a first in the UK and probably one of the first across Europe. We do that with a number of parties, but probably the biggest uh the biggest one that we've secured to date, which will be hard to top, is with Apple, where we're providing finance to Apple customers through their um stores in the UK.

SPEAKER_05 2:21

Yeah, excellent. And I guess you're ahead of capital markets, so kind of what does the funding picture for all of this look like? How are you funding your own originations at the moment?

SPEAKER_01 2:32

Yeah, we've uh we've got a a a great panel of lenders that support Propel and we've uh we've grown since the early days quite a few years ago now, where our first funder of any note was the British Business Bank. Um we were one of the first uh enable partners for the BBB. Since then we've expanded to to bring in some more traditional uh commercial banks. And we also run a strategy of on and off balance sheet funding, whereby some of the assets that we originate, we will sell to off-balance sheet funders through traditional forward flows and receivable structures, with the strategy thereby being to give us diversification, whereby we can manage our liquidity, capital, uh risk distribution, amongst other things, through on and off balance sheet financing. The benefit that brings to us is that we have a number of different routes, so we have large eligibility criteria and can serve various different segments of the market. I would say that one of the important things for Propel is that whenever we whenever we underwrite a new opportunity, we do that on the basis that Propel would be um happy to take that exposure on balance sheet, even though we may end up selling uh and do in fact end up selling a proportion to off-balance sheet funders.

SPEAKER_05 4:02

And you've also, I guess this is this is the reason we're here, you've also just um priced a debut in the public ABS market.

SPEAKER_01 4:11

We have indeed, George, yes. That was an interesting challenge for uh any first-time issuer. That's always a big piece of work, clearly. Doing so in the uh market that we ended up originating or ended up issuing in was interesting to say the least. But maybe just on the the bare facts, um so it was a 306 million issuance that was tranched across seven notes um on the debt side, and we also placed an X note and residual certificates. We did that through an equity process to begin with. So we started that back in the early part of February, um, with the debt process then kicking off in in late Feb. And clearly timing was uh interesting factor on this trade. I think we announced the market on the Friday with the Middle East conflict then starting on the Saturday, about 10 hours after our announcement. So yeah, quite an interesting week through the uh through pricing and marketing.

SPEAKER_05 5:16

Yes, and you can of course read all about it on the global capital website. Um Mike, I'll I'll I'll bring you in here. You you guys actually um bought this deal, I understand.

SPEAKER_02 5:27

Yeah, so we bought this uh this is actually our first public ABS investment of a of a strategy that we're hoping to to do more of in UK SME for UKSME issuers. Like for me it's it's also quite fun because I actually worked on the initial enable funding transaction ten years ago when there was just a 10 million uh 10 million of leases sitting on balance sheet uh for for Ian's company. Uh and we gave them quite a significant like warehouse line for the time given that their scale. So you know it's been great to be with Propel over that that whole journey from 10 million pounds uh under a few block lines to doing their first public ABS issuance with our first public ABS investment.

SPEAKER_05 6:08

Yeah, and what makes Propel such a good fit for the British Business Bank?

SPEAKER_02 6:12

So the the British Business Bank's mandate is to increase access to finance for um SMEs, and we we try and do that across the spectrum. Um we you know I think around uh GFC time before we existed, there was a lot of SME lending concentrated in in the big four or five banks, which is which is fine, but if there's a problem with them, you don't have uh much to fall back on afterwards. So it's been a big part of our um our mantra to to support the specialist banks and also uh support the non-bank lenders, all uh all offering different um routes to finance for for SMEs. Um we have a long history with Repel, so we know how that book performs, we know how they operate. We it makes it easier easier for us to execute like a public trade at pace with with someone that you know a long time and you've seen their history, and you know we wouldn't have been funding them for 10 years if we hadn't had good good results with them.

SPEAKER_05 7:07

Yeah. What's that journey like? Um Ian from from your side, like obviously from as Mike was saying, they're like a very small book of leases up to the point now where you're doing a public securitisation.

SPEAKER_01 7:20

Yeah, that the the support from the BBB has been invaluable for us, George. We we have grown and we've won a number of awards over the years for pace of growth, and that is only possible when you've got the funding partners behind you that that trust you to help deliver that funding. And ultimately, where Mike and the BBB sit support the UK franchise as it is, and I think we've probably developed together a little bit through the growth of the Enable program. BBB supported us previously when we were, I believe, one of the, or if not the largest, exposure for the BBB through that enable programme that enabled us to do our first takeout and kind of spread our wings and become a a a fully fledged institution with a private warehouse when we we took our assets from BBB and set up with uh with City. And all of that was the precursor to where we are today, being able to do a public securitisation. So great for us to have the support of the BBB as an investor, but a really nice story the fact that they were there to begin with and and are still supporting us today with uh with an investment into the program.

SPEAKER_02 8:29

So, yeah, just to say, um, I think part of Tripel's growth and you know being able to take us out in a private securitisation first before going on to the public ABS, it's all all markers in a lender's growth journey that that we're like really excited to see and and and and very happy to to support. So it's been like the whole journey has been a real success story for us as well.

SPEAKER_05 8:50

Yeah, so you kind of mentioned this is maybe a strategy that you're you're hoping to develop this investment into a public ABS. Where do you kind of see that going and what criteria would you have if you were to kind of invest in another public ABS deal?

SPEAKER_02 9:05

Yeah, so I I mean we've actually some of your previous guests on your on your podcast have mentioned that they for selfish reasons would like to see uh a broader UK SME public market. Um, you know, obviously, I guess like selfishly you might think if it's just me, everyone's gonna, you know, I I'm a scarce resource. But actually, you know, to invest in these things, we want to be able to do them quickly. So the more that there are, uh the more investors feel comfortable um going into them rather than being like, well, I I don't have a huge amount of time. It's something I'm not familiar with, I'm gonna have to go away and do do a lot of homework with. So we really want to broaden the um the number of SME issuers from it coming out of the UK, be that equipment leasing, unsecured loans, credit cards, or or or similar. So we're probably quite quite unique in as an investor in that we're not specific where in the cap stack we we like to invest. Uh so long as we get remunerated for the um the risk that we're taking, we're happy. So what I think that brings to uh a potential issuer is uh confidence that there is a uh an investor out there that you know if you're short of AAA's, we can invest there, but if you're short of double B's or double A's, we can invol also invest there. We what we want to do is is provide the UK SME issuer market confidence that if they do go to market, uh there is a reasonable size investor out there that's going to be able to help to help them. That's not to say we're just gonna invest uh blindly and be the dumb money in in deals. You know, we do do all our work and you know there are uh certain things that come up that we'll we'll question, challenge, and you know, if uh we don't like them, we might we might ultimately decline to pass on a on a note because uh you know maybe we we don't agree with uh with something in the structure. I'm not saying that's the case here all, but you know, uh we do do our work, we do our homework. But yeah, we ultimately we're gonna be uh here to give people the confidence to issue, and I think hopefully the more issuers there are from the UK in the SME space, the better it will be and the easier it will be for people like Ian to to print as regularly as they they require.

SPEAKER_05 11:06

You've talked about the kind of importance of of coming along together on this journey. Is that something that you would kind of favour in in other issuers, or would you also be open to kind of having your first encounter with a new issuer in the public market?

SPEAKER_02 11:20

So we're very happy for for that. Yeah, no, I think it's been quite helpful for us in our first investment to do it with someone we know, but I think if we want to grow the market, we're not gonna be we're not gonna hold people to ransom and say, no, you need to have done other programs with us. On the flip side, there are not that many SME lenders that haven't had at least a a form of touch point probably with the British Business Bank, especially since COVID. So I'm not as concerned on that. There might be there's maybe one I can think of that that hasn't had so much uh interaction with us, but it it's not uh it's not it wouldn't include them.

SPEAKER_05 11:51

And Ian, one thing that was interesting about this deal was it had the STS stamp, um, which is relatively rare in this asset class. What was the thinking there? And do you think it it helped the deal in the market at all?

SPEAKER_01 12:05

Yeah, I think uh I think George we've we were would have been the first uh equipment finance trade with the STS label. For us, it was never something that we went into with a view that it would improve the demand that we saw, and it's quite difficult to measure something in terms of would it what would it have looked like without that. But for us at Propel, the timing of this first trade has has taken some time. We've been looking at this for quite a while now, and with everything that we do at Propel, we we like to do things as well as is possible, and we've purposely delayed and taken our time to get the data to the place it needs to be, to get the the the business maturity and established private warehouses. STS for us felt like the right thing to do in terms of badge of quality, more than because we thought it would drive demand. We ended up with about a third of the class A being bank investors, so I'm sure that would have been of interest to them, and whether they would have invested with or without that, I think probably we would have seen similar demand. Hard to say. We do hope that it helps those investors with the secondary liquidity. I think that probably is where it comes in and has more value for the investors. But as I say, for us it was really about a mark of quality rather than a desire to drive more demand. Yeah. Does it make any difference for uh for you guys, Mike?

SPEAKER_02 13:34

No, for us um the STS is a nice to have, but we've we we're not capital um driven like uh like a normal bank. We invest off government balance sheets, so it doesn't give us any any actual tangible benefit to return. But uh certainly I guess if you were uh as as Ian says, uh a bank which is holding capital against its position, it it will probably affect the price in the rate that you you're gonna come in and and offer.

SPEAKER_05 13:59

So I guess last thing to kind of to kind of round up, I'd just be keen to hear kind of what's the plan for Propel now and and how the the business is gonna go forward. Is this ABS shelf the first of the first of many? Is uh what's the what's what's the vision?

SPEAKER_01 14:14

Yeah, it's certainly that is the intention, George. We we absolutely intend to become a programmatic issuer. That has always been the thinking behind this, the execution that we've achieved despite the challenging market backdrop has only reinforced that. I think in terms of the uh interest that we had, we were almost three times oversubscribed by the time we priced. And just because of the market situation, we we priced pretty quickly for an inaugural issuer in particular. I think important to call out that the BBB's support helped with that. Certainly wasn't a deal-defining amount, Mike. I hope that's it's okay for me to say, but helpful to have that certainty up front of an investor coming in. But we were pleasantly surprised to to see a lot of interest in the trade, and some of that came from the groundwork that we'd done previously through non-deal roadshows. But I think it just illustrates the appetite investors have for this asset class and for investors uh and for issuers such as Propel. We will certainly be back to market. Time will tell how quickly that comes around. But I think when we do come back, we'll be looking to expand that investor base. Probably a little bit unusually. We we don't have too many features to add. We we piled the features into this first one, which was great for us to be able to do. So I would I would say more of the same. And hopefully next time it will be a bit calmer through the markets when when we do that.

SPEAKER_02 15:47

That'd be great, because then we don't have to rebuild our models uh when we're looking at the next one.

SPEAKER_05 15:51

Great. Well, thank you very much to you both for for joining me and exciting times ahead, and congratulations on on a first time to you on on both sides. Otherwise, it's it's goodbye for now. Thanks very much. Thank you, George. This conversation is being recorded on Thursday the second. And we have Tom Hall, our ABS reporter here, and Thomas Hopkins, our CLO reporter, uh, to talk about the big stories in in their respective markets. Tom, we'll start with you. What's going on in ABS?

SPEAKER_03 16:27

Yeah, so we've had a little bit of a sort of slowdown over the last this week and last week. I suppose uh this week has been less pricing. We've just had uh Socceram Bank uh pricing its French auto ABS, and that that was sort of expected because it's always quite a uh a tough week for the market, this one in you know ABS land. You need a long uh execution sort of window to get a deal done, and you only have four days to get it done if you bring out a deal this week, and then you have the the four-day weekend. So if you put a deal on screens on the Monday, it risks getting uh put into next week. And also I think uh sort of investor engagement tends to be a little bit weaker this week. So um yeah, I I did sort of a story on that, but it's also uh a bit of a sum up of you know the the the first quarter where we we've had a really strong sort of market.

SPEAKER_05 17:23

It feels like it's been relentlessly busy, doesn't it? Um is it is it a record or is it not quite a record?

SPEAKER_03 17:30

It is a record. It's sort of been uh it's been kind of a a table of two marches of uh the the first half of March where you know I was speaking about we were getting like nine or ten deals a week for about two weeks, which is sort of you know September levels, which is really you know the the busiest the market sort of gets. Um and I put in the piece, I think there was uh it was recorded from uh rubber bank research that this was by March 25th, so before uh the end of the first quarter, uh there's been 22.6 billion euros of ABS issuance, uh excluding CLOs, and that is the record for highest first quarter issuance since you know the global financial crisis. So I mean it it has been, you know, just despite Iran and what what you would expect, you know, on paper to be a really difficult uh start to the year, it has actually been really strong. It's kind of demonstrated that the market is actually you know really sort of robust and just kind of you know chugging along and sort of you know not not letting uh any of the the wider geopolitical events get it down.

SPEAKER_05 18:37

Well, there you go. And now I'm gonna ask you a very perilous question, considering we're recording on Thursday and this is probably gonna come out towards the end of next week. What are you expecting in the pipeline for April and and maybe further on into Q2? Is it gonna be another record quarter?

SPEAKER_03 18:54

I think the the signs are probably positive. I mean, I've heard mixed things of you know, for April. I've I've heard you know a few bankers have been saying that their pipelines are looking a little bit lighter for April and then they maybe pick up and we get heavier issuance in May. You know, we we've got you know lots of issues lining up. The the question will be sort of you know, A, can they delay their funding or do they need it now? And then, you know, in in which case, if it's the latter, then they're gonna try and go as quickly as possible. But even if it is the case that they can afford to delay their funding, then the calculation is gonna be, you know, are are spreads looking like they're gonna get better or worse? And with you know the the situation in Iran, I think it it probably leans slightly towards uh you know things are either gonna sort of stay the same or get worse. It doesn't look like we're gonna see any sort of tightening in the near term, sort of next few months. So it looks like we are gonna see uh quite a busy second quarter, and who knows, yeah, may maybe we could even see another issuance record.

SPEAKER_05 19:57

Well, we did have one bit of exciting news this week. Um we've obviously just heard from one debut equipment leasing issue in in Propel, and we have another one on the way.

SPEAKER_03 20:08

Yes, we do. This is uh Van Mossel. So they're a uh a Dutch auto leasing firm and uh they they're preparing a a non-deal roadshow uh with the goal of bringing out a public ABS program. So uh I think that that's very interesting. I mean, obviously in in that space the the sort of most obvious competitor would be Hilterman Lease. They've done five transactions since 2022. They also do um you know auto-leasing to SMEs. Uh so it's not you know uh an asset class that will be super alien to investors. It it there clearly is you know demand for it. So yeah, I I think that would be uh a very interesting uh sort of program uh to come.

SPEAKER_05 20:54

There's a bit of a head of steam, isn't there, in the in the Netherlands after the the B quip deal as well. Was it something that people were excited about when you were in Amsterdam for that Alt V conference recently?

SPEAKER_03 21:04

Yeah, it was interesting. I mean, um I I don't think it was funny, I d I don't think leasing was really as big topic there as maybe as maybe perhaps it should have been, obviously, with you know with this deal and you also have Hilterman and as you said B Quip. So I mean it it is feeling like and and basically half of you know, we I did a leasing story uh a few weeks ago and and sort of said, you know, there's only sort of five regular issuers if if An Mossel becomes one, uh then it will be six. So basically half of them will be Dutch. So it does feel like uh the you know the the Dutch are sort of really leading uh the leasing ABS market. So uh yeah, hope hopefully more more Dutch leasing stories to come.

SPEAKER_05 21:47

Both the leasing story and Tom's Weekly, which is called Tough Week for ABS and Post Crisis Record first quarter, are on the website. But we should move on to CLOs because we uh have not given them due attention so far in this episode. Thomas, what is the latest? I mean, you know, CLOs have had a have had a rough uh time, haven't they? Is that is it any better yet? Any good news?

SPEAKER_04 22:10

Um not especially exactly, George, although I mean I will say, you know, the CLO market has been a little bit more resilient than a couple of people that, you know, I think were commenting on the market were thinking, because I mean I do remember having sort of one manager that I was speaking to a couple of weeks ago who'd sort of just done a deal who said that you know they sort of sincerely didn't think that there would be any more deals pricing before Easter. And we did actually see like a few deals sort of take place last week. So you know I think there were sort of you know four or five deals um last week. I mean one was a very very small refinancing but nonetheless still counts. And so I think there has been you know a tendency that some managers have managed to kind of push ahead and and issue deals but the pipeline has definitely definitely slowed down I think over the last few weeks. And you know as of this Thursday morning I haven't seen any deals come along this week but I think that might have slightly more to do with Easter than it does with the you know sort of Iran conflict and software. But I think the consensus that seems to be coming out of the market at the moment um is just certainly that the Iran war for as long as it continues is going to make things a little bit difficult for CLOs and so we might see a slightly slower pipeline. I mean of course you know if it does become a very long-term conflict you know managers might have to do what they did with you know Russia Ukraine and figure out ways of getting past this but you know I think certainly my tentative prediction would be that you know assuming the war continues we will continue to see a sort of you know some deals emerging but not necessarily a huge deal flow at least for the next little while.

SPEAKER_05 23:49

Let's talk a bit about spreads then I guess like the narrative had been like triple A's are moving a bit wider and single B's are moving a lot wider. Is that still kind of where we are is that can continuing to to widen or are we settling down now?

SPEAKER_04 24:03

Yeah I think that you know that's remained reasonably consistent. I think triple A's you know where your sort of better managers earlier in the year were getting sort of 120 or even a in a couple of cases like a 118 119 prints although those were rare but you were getting managers closer to 120 on the triple A's earlier in the year you know they're now sort of around 130. So there's been about 10 slightly over 10 basis points of uh of widening on the triple A's the single Bs yeah you're right they've widened quite a lot and in fact quite a few managers at the moment are choosing actually just to retain them and you know not even to sort of go to external investors with them at the moment because if you go to sort of external investors you'll uh you're going to be getting a discount margin that's probably you know around the thousand basis point mark which is pretty expensive for single bees obviously and you know that has a marked effect on your arbitrage so managers are actually finding that what they can do is just use their captive equity funds to buy the single bees the captive equity fund is then the note holder and because obviously they're they're not going to go for a DM of like a thousand if the captive equity fund's buying it but it'll still be I think I saw one recently that was sort of 925 basis points DM, you know, owned by the captive equity fund and that was actually quite an attractive return if you're a captive equity fund uh particularly given that you know as I was writing about this week it's quite difficult to make the CLO return CLO equity returns work so maybe you can get some uh some nice mes debt returns in with your with your fund. Are those still pricing at par those like thousand over uh uh no no they're the so you get a sort of thousand discount margin you know with sort of maybe issued at sort of 96 so there's definitely some OID being applied to these single Bs.

SPEAKER_05 25:55

So as you were you said you've you've written about the equity this week and uh probably makes sense to talk about it. What is the effect on the arbitrage of all the all this spread movement?

SPEAKER_04 26:06

Well yeah I think certainly CLO equity's had a difficult time of it the last little while as I've you know pointed out in some previous podcasts but if we just look at the sort of kind of the history of what's been happening sort of so far this year we started in January with a 30 billion euro repricing wave that's a record kind of repricing wave as far as we know so that the spread's tightened quite a lot on CLO assets because of that repricing wave. And you know at the same time in fact yeah I mean if you if you look at some Bank of America figures on that I mean the the sort of weighted average spread across European CLOs within investment sort of dropped below 360 basis points in in January. And if you look back at the data going back the last five years that's easily the the lowest level in five years. So you know bear in mind these asset spreads are very tight. At the same time sort of following you know this the sell-off of software loans because the danger that AI kind of presents to software companies uh sort of you know business models and following the Iran conflict which is causing higher energy prices which threatens particularly industrial sectors like you know chemicals and building materials and the sort of spectra of potential inflation and rate hikes you know spreads have also widened uh because of that because in both cases they raise the risk of defaults in CLO portfolios and so you know if you have tighter asset spreads and wider liability spreads what do you get you get a compressed arbitrage. So and uh you know also up until recently it's been pretty difficult for managers to uh kind of build par, which is one way that you kind of boost equity returns if your arbitrage is tight. That is changing now but I think you know some of what I was exploring is you know the different strategies that managers might have to try and make these equity returns work despite a tight arbitrage.

SPEAKER_05 28:03

So can you just go and buy some of these loans in the 80s wait for them to to pay you back build all the power and the equity is laughing?

SPEAKER_04 28:11

Yes so in in theory yes because you know up until recently you know in January we had two-thirds of the leveraged loan market trading at or above power and that was part of quite a long-term trend it happened for a couple of months last year really and now you've got like less than 10% trading at or above par. So loans are trading down. And so at least yes George you're correct in theory you can as a manager go and buy a whole lot of distressed debt or at least debt that has the appearance of being distressed because it's not necessarily distressed if it's trading in the 80s but it might well be but you can go and buy a whole lot of debt trading in the 80s, the low 90s, and then wait for those loans to appreciate in value because if loan prices rally you can then obviously sell those loans and you flush a whole lot of nice cash down to equity. But you know that's more complicated than it might appear because when loans trade at ninety or into the 80s even with the whole market trading down a little bit now there are usually some reasons that that's the case. You know there's there's usually a sense from the market that these loans are deteriorating a bit in credit quality and so you you do take a risk and if what you end up doing is you know buying a loan that then defaults or if it just falls further in value and you you essentially you have par loss or you burn par to use the sort of industry jargon that's quite hard to repair. So you know there are more opportunities though because say at the moment where there are opportunities I think is where you had loans that were once trading at 101 and now they're trading at 9899 well those are probably still very good quality loans it's just the whole market has shifted down a bit so you might be able to build a bit of power sort of buying those but without sort of the the default risk attached.

SPEAKER_05 29:59

So I guess the bottom line of all of this is still quite a difficult situation for equity even if there are some opportunities. Do you think that means third party equity is kind of out of the picture for the time being and we're going to see captive equity only deals or do you think there are still opportunities to bring a bit of third party equity into the right transaction?

SPEAKER_04 30:20

Well yeah I mean I think it's it's certainly complicated for third party equity at the moment I mean and for just broader equity at the moment because to try and make these returns work I mean what some managers have been saying to me is that what they're doing is kind of applying a very cautious and conservative approach, making a few conviction trades below the 98 or 99 mark, but often concentrating on the highest quality loans, avoiding par losses, which at least preserves the value of their portfolios but by the same token you can't just preserve the value of your portfolio you do actually need to have returns beyond that. And that's complicated right now if the arbitrage doesn't work and buying cheaper loans is quite risky how do you boost your returns and there's not an easy answer to that. And you know part of the part of the reason this is so difficult is because captive equity funds have kind of bolstered the market in a way but it's allowed managers to keep printing which means that you don't have the kind of self-correction mechanism that would otherwise apply, you know, to make equity returns better. Because if you were more reliant on third party equity, well then eventually what would happen is CLO issuance would fall if equity returns looked unappealing. You know, borrowers then would be forced to offer sort of wider spreads um which would improve the arbitrage and gradually you know your your returns would improve but that kind of self-correction mechanism has sort of been taken out of the out of the market. What people are saying to me is that what you were saying George about you know third party equity being out of the picture for now I think that's that's certainly mostly true from what I've heard. A lot of the deals I've covered recently have been either 100% captive equity or majority captive equity. And it that's particularly going to be true for deals that had started to ramp before loans started to trade down. Because if you can imagine if you've bought a whole lot of loans at 101 and these loans are now worth you know 95 or 97 and you know you're about to try and price your CLO no third party equity is going to sort of you know take that risk or few third party equity investors would take that risk. The one area where there might be some opportunity really is sort of for deals that haven't really started ramping yet which might be able to take advantage of some of these cheaper loans and third party equity could theoretically be interested in that. In fact that's what I was talking about in in a leader that I that I wrote this week as well.

SPEAKER_05 32:44

Yes why don't you give us a very quick summary of the leader before we wrap up and then I'll give people the directions to find both.

SPEAKER_04 32:50

Yeah essentially I think in the in the leader I was sort of arguing that there is currently a kind of high risk high reward strategy for third party equity investors in CLO equity. You know and and the reason for this is precisely because what we've been talking about is that loans have been trading down. So if you're a third party equity investor and you put money into a deal right now, you know the manager might be able to sort of ramp their portfolio at say 96 or 97 on average and then over time you know the value of those loans could go up again and you could have quite decent returns. We did actually see this happen with a couple of deals in 2022 after Russia Ukraine. Some of the third party equity investors that put money into deals just after that happened did quite well but it's high risk because as I was saying earlier the very reason that loans are trading down is because there are very real, very fluid very unpredictable risks that apply to CLO portfolios right now. And obviously if you have put equity into a CLO well you're in the first loss position and if things start to go really bad for CLOs and equity because of software in the Iran war, well you might find that there's limited liquidity in the market and selling out of that position might be difficult. So it's high risk but theoretically some of the deals available right now certainly according to what market sources have uh uh told me if you were to put some third party equity into them and they had you know ramped their portfolios very cheaply you could see some better returns than what's typically been available in a quite a some stressed asset class in some ways over the last few months.

SPEAKER_05 34:27

Well there you have it if you want to read the leader it's free and it's called Cielo Equity has become a high stakes bet for investors. And the weekly is called No Easy Answers for CLO managers wrestling with equity returns puzzle and they are both on the website. I think that is probably just about all we have time for today and and that's where we should leave it. Maybe I'll leave you of one final thing which is Hazel has got to the age now where she always says to me you know why why why I was thinking just as I was hosting there she could just come and do my job now.

SPEAKER_04 35:01

That's all the journalist does at the end of the day yeah we just we just sit there and ask a whole lot of questions basically that is our job so you know I think you've got the makings of of a reporter on your hands George you know yes well quite well next week it'll be Hazel but for now it's goodbye. Goodbye goodbye