Dec 1, 2022 · 1h 19m · capital-allocators
Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284)
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In this masterclass episode of Capital Allocators, Eagle Point Credit Management founder Thomas Majewski explores the structural mechanics, historical resilience, and market inefficiencies of Collateralized Loan Obligation (CLO) equity and debt 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 10.6% of the talking time here. How this is scored →
Ted as informed peer 3.3 Guest teaching 6.0 Guest disagreement 1.7 Ted pushing back 0.3
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 36:25 Mocking debt-focused collateral managers
Majewski derides the widespread industry mindset where collateral managers manage for the debt tranches, calling it unthinkable for any standard equity sponsor to invest with a team working for their creditors.
Hardest push from Ted ▶ 21:20 Ted interrogating leverage mechanicsTed challenges the narrative around bank stability by pressing directly on leverage risks and how liability tranching affects risk propagation across the CLO capital structure.
Biggest teaching moment ▶ 13:00 Par reinvestment dynamics in distressed marketsMajewski educates on why prepayment rates matter far more than default rates in cash flow CLOs, showing how reinvesting 12% annual par payoffs into loans priced at 70 cents generated massive outperformance in 2006-2007 vintages.
Ted holds their own ▶ 1:02:30 Ted framing allocator concerns on maturity wallsTed articulates the core macroeconomic concern around short-term mark-to-market and looming corporate maturity walls to test the resilience of Majewski's thesis.
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 Transitioning to Cash Flow CLOs | 3 | 6 | 1 | 0 | Ted opens with a standard biographical prompt about structured credit. Majewski delivers an extensive narrative detailing the early days of market value CLO unwinds at JPMorgan and the structural shift toward cash flow CLOs. | |
| Exercising Equity Rights and Post-Crisis Performance | 3 | 7 | 2 | 1 | Majewski details the pioneering of equity call rights and explains why prepayments at par during market distress enabled 2006-2007 vintage CLOs to heavily outperform their original base cases despite high headline defaults. | |
| Structural Mechanics and Unit Economics of CLOs | 4 | 7 | 1 | 0 | Ted asks for a breakdown of CLO unit economics. Majewski explains the quarterly over-collateralization test mechanics, excess spread waterfalls, and why CLOs operate as insulated balance sheets without run-on-the-bank risk. | |
| Leverage Dynamics, Tranching, and Capital Structure | 4 | 6 | 1 | 1 | Ted probes on how leverage and tranching are constructed. Majewski clarifies that non-recourse, long-dated CLO leverage carries zero mark-to-market margin risk compared to bank repo lines. | |
| Launching Eagle Point with Stone Point Capital | 3 | 5 | 1 | 0 | Majewski recounts the founding of Eagle Point, explaining why standard fund seeders were insufficient for the strategy and detailing their partnership model with private equity sponsor Stone Point Capital. | |
| The Majority CLO Equity Strategy and Market Inefficiencies | 3 | 6 | 2 | 0 | Majewski addresses widespread market misunderstandings conflating CLOs with CDOs, citing historical pre-crisis positive equity return stats and the 700 bps return dispersion across managers. | |
| Origination, Manager Diligence, and Proprietary Analytics | 3 | 7 | 3 | 1 | Majewski outlines manager diligence, dismissing the common manager belief that they should manage for debt holders rather than equity as laughable for any real equity fiduciary. | |
| Manager Roster Dynamics and Secondary Sourcing | 3 | 6 | 2 | 0 | Majewski contrasts primary manager underwriting with the secondary BWIC and private trade processes, highlighting market opacity and how to capitalize on distressed sellers. | |
| Portfolio Stress Modeling and Exercising Equity Options | 4 | 6 | 2 | 0 | Majewski explains the scenario analysis and proprietary stress testing behind secondary bids, followed by a breakdown of exercising equity rights such as resets, refinancings, and call options. | |
| Eagle Point Organizational Culture and Competition | 3 | 5 | 1 | 0 | Majewski describes Eagle Point's internal culture, specialized team roles, and the relatively small Greenwich-centered peer group of dedicated CLO equity managers. | |
| Refuting Maturity Walls and the CLO BB Debt Opportunity | 4 | 7 | 3 | 1 | Ted brings up allocator hesitation and maturity wall fears. Majewski forcefully dismisses the maturity wall threat as recurring alarmism, explaining how PE sponsors roll debt, and highlights the high-yield opportunity in CLO BB tranches. | |
| Five-Year Vision and Concluding Reflections | 3 | 4 | 1 | 0 | The conversation moves into concluding reflections on Eagle Point's five-year trajectory, expanding into BDC debt, investment pet peeves around ironclad manager contracts, and personal leadership lessons. |
Statements from this episode (27)
Majewski: CLO portfolios actively change over time unlike static securitizations
“Unlike most other forms of securitization, the assets vary over time. If you invest in a mortgage pool or a auto securitization, you start with a 1010 thousand, a 100,000 loans, whatever it may be, and that's what you get, and you hope they all work out, and i…”
Majewski: J.P. Morgan held $10B+ in market value CLOs in 2002
“Now, at the time, the bank had over ten billion dollars of exposure to these investments. The bank's market cap was only around thirty billion dollars at the lows in 2002.”
Majewski: Prepayment rates matter far more than default rates in CLOs
“CLO people really talk about default rates. How many loans are going to default? The prepayment rate, in my opinion, is far more important.”
Majewski: 12% of loans paid off at par annually in 2008–2009
“And even in 2008 and nine, on average, 12% of loans paid off at par each year.”
Tom Majewski: 2006 and 2007 CLOs far outperformed their pitch-book base cases
“And what turned out to be the 2006 and 2007 CLOs, the vintage medians from those periods far outperformed the base case in the pitch books. Not because they had good loans. They probably had some bad loans, but they had the ability to keep reinvesting with loc…”
Majewski: CLO equity residual cash flow is typically 25% to 30% annualized
“And then the equity or residual holder gets all of the net investment income after all the expenses, if the lawyers needed something, the rating agencies always have a small fee, and that excess cash flow is typically about 25 to 30% on an annualized basis.”
Majewski: Leveraged loan index delivered positive returns in 28 of 30 years
“The Credit Suisse Leverage Loan Index is sort of the S&P 500 of the loan market, and it's had a positive return for 28 of the last 30 years.”
Majewski: CLOs avoid bank run risks because debt matures after loan assets
“A CLO has no financing that's due Prior to its last loan maturing. So we can see every loan through if we want to its ultimate maturity date. And again, every loan will default or pay off at par. It's a binary outcome. And I have financing in place that's long…”
Majewski: CLO AAA and AA securities have zero historical impairments
“There's never been an impairment in the history of the CLO market on a AAA or AA security issued.”
Majewski: CLO AAA tranches require 70% corporate defaults to impair
“They typically have 35% credit enhancement to the triple A level, and if you think about companies recovering 50 cents on the dollar, you'd need 70% of corporate America to default.”
Majewski: US CLO market size is $750B to $800B
“If there's probably 750 to eight hundred billion of CLOs outstanding in the United States right now”
Majewski: Eagle Point Holds 101 Majority Positions Across CLOs
“And as I mentioned earlier, we have, I literally saw the report yesterday. We now have 101 majority positions across CLOs”
Tom Majewski: CLO opacity means investors need to be in the club
“CLOs are not reported on trace, for example. So it's a little more of an opaque market where you need to be in the club to be able to really outperform.”
Majewski: Only ~20% of CLO Managers Prioritize Equity Returns
“Only about 20% of CLO collateral managers really share that DNA of appreciating they're trying to deliver returns for the equity.”
Majewski: CLO Equity Returns Depend on Manager Quality, Not Portfolio Quality
“There's no correlation, in my opinion, to the returns to the equity based on the quality of the portfolio. It's all about the quality of the collateral manager.”
Majewski: CLOs Are the Most Transparent Pooled Investment Vehicles
“So the richness of the data, there's no more transparent pooled investment vehicle than a CLO.”
Majewski: In secondary CLO markets, there are no bad bonds, just bad prices
“When you're buying used with limited exception, there's no bad bonds, just bad prices now.
And if someone's a little less good at managing a CLO, we'll just back up our bid five points and maybe that offsets it.”
Eagle Point bought majority CLO positions at 20–25 cents on dollar in 2020
“In the depths of 2020.
We were buying majority positions at 20, 25 cents on the dollar.”
Majewski: Higher default and lower reinvestment price scenarios produce best CLO returns
“Oddly, the higher default, lower reinvestment price scenarios are typically the best, but that goes back to my data about 2006 and seven being the best vintages.”
Tom Majewski: Continuous CLO supply allows investors to easily pass on deals
“On a CLO, there's always the next one, and we have to keep that in mind. Let's not, if we can sense this, someone else bidding keenly. Okay, that's fine. We'll let this one go. That's the nice thing in our world. There's always another. They're good and bad. T…”
Majewski: About five firms form the core sophisticated CLO equity market
“There's probably about five firms that form the core of the equity market who are, I think, the street would consider the most sophisticated, and then it kind of trickles down from there.”
Majewski: 96% of pre-crisis CLO equity returned positive with 15% median IRR
“96% of CLOs had a positive return to the equity class from before the financial crisis with a median of 15 IRR, outperforming private equity, outperforming the S&P 500 even.”
Majewski: Eagle Point will see a down 10%+ month in five years
“In the next five years, we're going to have a down 10% plus month. I don't know when. I don't know why. I know it's going to happen, and if that's not something you're comfortable with, this is probably not the right investment for you.”
Majewski: Long-term default rate on BB CLO debt is under 20 bps annually
“In my opinion, you take very little credit risk buying CLO debt, even at the double B level, the class just above the equity, the longterm default rate is less than 20 basis points per annum.”
Majewski: Only two 1940 Act companies have ever defaulted, both with full recovery
“In the 82 years since the 40 Act has been passed, as best we're aware, there's only been two defaults ever by 40 Act companies, and both were a hundred percent recovery.”
Majewski: BDC debt outperformed BDC equity on an index basis from 2014 to 2019
“BDC debt outperformed BDC equity from 20 14 to 20 19. Even though there weren't a lot of credit problems then, just the yield opportunity was so great, it outperformed on an index basis the equity.”
Majewski: CLO collateral managers cannot be removed absent gross negligence
“Absent capital C cause gross negligence, you can't remove a collateral manager. You can always sell your security. By and large, the vast majority of CLOs Have these ironclad contracts, which in a private equity fund or a hedge fund would not be tolerated.”