Opinion
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.”
Opinion
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.”
Insight
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.”
Insight
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.”
Assertion Not checkable as stated
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…”
Assertion Supported
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.”
Insight
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.”
Opinion
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.”
Opinion
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.”
Assertion Supported
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.”
Assertion Supported
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.”
Assertion Supported
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.”
Assertion Partly supported
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.”
Assertion Not checkable as stated
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.”
Insight
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…”
Assertion Contradicted
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.”
Disclosure
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.”
Insight
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…”
Assertion Not publicly verifiable
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.”
Assertion Supported
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.”
Insight
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…”
Assertion Supported
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.”
Assertion Supported
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.”
Assertion Partly supported
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”
