Apr 11, 2024 · 50m · capital-allocators
Shiloh Bates – CLO Investing at Flat Rock Global (EP.379)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Capital Allocators, host Ted Seides interviews Shiloh Bates, Chief Investment Officer at Flat Rock Global, to explore the structural mechanics, historical resilience, and investment opportunities within the CLO market. Bates details Flat Rock's middle-market underwriting strategy, the advantages of interval funds for RIA liquidity, and actionable insights from his definitive book on CLO investing.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 15.3% of the talking time here. How this is scored →
Ted as informed peer 3.8 Guest teaching 5.0 Guest disagreement 1.0 Ted pushing back 0.9
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 25:41 Dismissing traditional loan-level due diligence
Shiloh directly pushes back on the conventional wisdom of analyzing every underlying loan in a CLO portfolio, explaining why doing deep dive due diligence on individual credits is counterproductive.
Hardest push from Ted ▶ 12:56 Ted challenging the 30-year low default history assumptionTed presses Shiloh on whether historical default numbers hold up given that most of the 30-year track record occurred in a declining interest rate environment.
Biggest teaching moment ▶ 9:51 Deconstructing the CLO balance sheet as a bankShiloh clearly and methodically educates the audience and host on the exact cash-flow mechanics, default rate budgeting, and tranche subordination within a CLO.
Ted holds their own ▶ 19:03 Ted identifying the chicken-and-egg financing paradoxTed demonstrates sharp technical insight by pointing out the sequencing challenge of committing equity before knowing final debt syndication pricing terms.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Career Origins and Historical Evolution of CLOs | 3 | 5 | 1 | 0 | Ted guides the conversation through Shiloh's career arc and market history with straightforward prompts. Shiloh gives a comprehensive educational overview of CLO growth, tranche sizing, and debt performance relative to CDOs. | |
| Genesis of the CLO Investing Educational Book | 3 | 6 | 1 | 0 | Ted asks Shiloh about his book and the structure of CLO balance sheets. Shiloh provides a detailed masterclass comparing CLOs to simplified banks and breaking down default rates across equity and double-B tranches. | |
| Macroeconomic Dynamics and Quantitative Pool Analysis | 5 | 4 | 1 | 2 | Ted demonstrates solid credit knowledge by questioning how the asset class will perform in a rising rate environment after 30 years of falling rates. Shiloh explains interest coverage cushions and quantitative pool statistics. | |
| Manager Landscape, Debt Syndication, and Asian Financing | 4 | 5 | 1 | 2 | Ted asks targeted structural questions regarding manager competition, Asian debt syndication, and warehouse financing. Shiloh outlines the tight-knit circle of equity providers and Japanese bank AAA buyers. | |
| CLO Equity Screening and Comparative Credit Evaluation | 4 | 5 | 1 | 1 | Ted inquires how CLO equity risk-return compares to other credit assets and how Flat Rock screens opportunities. Shiloh details why they focus on portfolio-level quantitative screens rather than single-name loan underwriting. | |
| Active Portfolio Management and Middle Market Specialization | 4 | 5 | 1 | 1 | Ted asks about active management churn and handling large data sets across managers. Shiloh explains their strategic niche in middle market CLOs versus broadly syndicated loans. | |
| Interval Fund Structures Versus BDCs and Private Credit | 4 | 5 | 1 | 1 | Ted asks comparative structural questions about interval funds versus BDCs and private credit vehicles. Shiloh highlights liquidity profiles and why interval funds avoid the public discount volatility of BDCs. | |
| Execution Precision, Crisis Strategies, and Future Outlook | 3 | 5 | 1 | 0 | Ted explores modeling precision, unwinding mechanics, and crisis trade decisions before concluding with personal questions. Shiloh shares tactical pivot strategies used during COVID-19 to buy discounted double-B notes. |
Statements from this episode (14)
CLO AUM grew from $6 billion in 1998 to $1 trillion today
“So there was basically about six billion in AUM when I joined. And there was six different CLO managers. And today there's really over a trillion in CLO AUM and about a hundred different active CLO managers.”
The CLO equity tranche represents a $100 billion asset class
“Of a trillion of CLO AUM, the CLO equity tranche is about 10% of the CLO's financing. So it's a hundred billion asset class for CLO equity in particular.”
CLO equity returns reached the high 20s during the Global Financial Crisis
“And then if you were in contrast, an investor in CLO equity through the financial crisis on a buy and hold basis, a lot of the equity in those deals return high, 20% returns and the debt in the CLOs defaults rarely as well.”
AAA CLOs would have buffered banks during the 2023 banking crisis
“If you look at the banking crisis of the spring of last year, look, if banks would have owned AAA rated CLOs instead of some of the bonds that might be in the Bloomberg aggregate bond index, CLO AAAs might've traded to 97 cents on the dollar or something like …”
30-year average annual default rate on CLO loans is about 2%
“You can look back 30 years, and by our estimate, the default rate in CLOs is about two percent.”
30-year default rate on BB-rated CLO debt tranches is 20 basis points
“If you look back over 30 years, the default rate on CLO double Bs is around 20 basis points.”
BB-rated CLO debt currently yields over 12% with minimal defaults
“Today, because CLO BBs are floating rate, and because the Fed has hiked so much, we're getting yields in the 12% plus area, and defaults have been really, really minimal.”
CLO managers typically earn 30 to 50 basis points in fees
“They earn, call it, 30 to 50 basis points to put together the initial loan portfolio to keep the CLO fully invested.”
Only about 15 institutional investors provide initial CLO equity
“So I think there's about 15 of us. One of the common jokes in the CLO industry is that you go to CLO conferences, of which there's many, and it's a common theme that, ah, you know, there's new investors coming into the market, and you kind of always hear this,…”
Only about 6% of CLOs have historically generated a negative IRR
“So by our math, it's about six percent of CLOs that have had negative IRR.”
Broadly syndicated loans comprise 90% of the CLO market
“The 90% of the CLO market is broadly syndicated CLOs. So if you look in there, you're going to find companies who borrow a billion dollars and up basically.”
A diversified CLO portfolio requires roughly 20 positions at 5% maximum
“To be diversified in the CLO market, I would say it's something like having max positions of around five percent of the portfolio. Each CLO, again, is going to have 200 or 300 different loans in it. You would not need a hundred CLO equity tranches to be divers…”
Asurion is the single largest loan held across CLO portfolios
“Asurion is the largest loan in CLOs today.”
CLO equity liquidations often return just 40 to 50 cents on the dollar
“There's no par payout at the end. A lot of times you're getting back 40 cents, 50 cents on the dollar. Now, over the eight-year life of the CLO, you've got these very large distributions along the way. Hopefully it nets to a nice return for you, but you don't …”