YouSaid · the spoken record

Thomas Majewski

lines on the record: 112
first: 2022-12-01
most recent: 2022-12-01
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“So here it's equally murky but different. CLOs trade secondary two different ways. One is called a Bewick or Bid wanted in comp process. And if I look at my phone, There'll be 15 Bewicks today, do it various times. Usually at some If you're a deep insider, you probably know who the seller is, but it's not published who the seller is. Or you might know, oh, that person bought that bond originally, so it's probably them selling it or whatever it may be. Not that it particularly matters, but some sellers are simply doing a pricing exercise, particularly around month end. So everyone on the street does a ton of work, puts in all these bids, does not trade.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's a good call to get on your first day Now, it was at our maybe at our rate card That's a good way to start on your first day on the job. Hey, the largest investor in the market wants to start us with a billion, and they've never really done business with us in the past. So that's a win-win-win, and we're very friendly. She said, you'll never get that deal again. But you'll always get the best. And that's the way to do business where we knew as a quality firm, but maybe they just needed a fresh leader at the head of that business, and we knew this person was perfect for it. So those are the kind of organic things that happen. CLOs are living, breathing things. management teams are living breathing things just like any private equity firm or hedge fund firm you have to monitor those changes and make sure what you signed up for is what you keep getting”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“We kind of backed off for a while. Then they got sold to an even bigger company. No integration, just that business changed business cards a little easier. But we let some time pass. They righted the ship, and we're back in business with them. So there are situations like that that have happened. There are some that if the senior person retires, you have to make a decision on the next person. How are they going to take over and do things well? Other examples, the number 2 p.m. at one of our largest CLO collateral managers got hired to be the number one at a different big firm. And we hadn't done business with that firm in a while, but we knew that she was going to light it up, did very well for us in the past. The old firm had a deep enough bench we weren't worried. The new firm big, big private equity firm on her first day on the job, we said, well, why don't we do two new CLOs for a billion dollars in total?”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“One to two a year has basically been once we ramped up, so we start in 2012. By 2015, we had a bit of a mature portfolio. It's one or two a year, and sometimes it's just a pause. One firm Was our largest exposure at a point. They bought another small firm It was probably less than 10% of their AUM, but just the pain and suffering of any merger, doesn't matter how big it is, is a challenge. Maybe they got a little distracted and was maybe during a difficult time in the credit market.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“And then we steward the transactions. We're not buying and selling the loans, the collateral managers are doing that. We've diligent the heck out of them. But what we do is we continue to talk to them regularly. And I think anyone we invest with would say, oh, those guys at Eagle Point call us regularly with our largest CLO collateral managers. We have Open Bloomberg chats with them live every single day. About, we're partners, we want them to succeed. They want us to do well. It's a symbiotic relationship. And we want to make sure they're focused on our portfolios.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“8.2 and a CLO from 2017 that were not involved in. He'll know what that provision happens to be and his ability to draft the documents and negotiate with the investors because then the investors who are buying the debt tranches have a bunch of comments on the documents.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Can sell the equity at a much higher price than our discounted level. You can buy some back from us and go say, we want you to make a profit, just not too much from us. And partnerships last when everyone gets rich together and we're mindful of that. We want to use our scale of capital to help us make a lot of money, our investors, and the people we do business with enable them to do more business in aggregate. We might like some preferential economics along the way. So what we change that competitive process around, we put the banks in competition with each other instead of us being in competition with other investors. Then from there, we lead the execution process. We have a full-time structuring person. We have another person on our team whose principal job is to read every CLO indenture in the market. In theory, the worst job on Wall Street. In fact, he's the second most fun guy at our company. He does a tremendous job. He can light up any room. But he also knows provision.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Those are the folks we're going to gravitate to. And it's ultimately blindingly obvious that some of our largest collateral manager relationships we've been investing with them consistently since 2012 or 13. In most cases, we're their largest single investor, which it's always important for both sides of the relationship, but they deliver consistent returns for us. And that's what we like. So once we've shaken hands with them on some economics and we figure out the terms and the basic things between us and the management team, we then call investment banks. Morgan Stanley or Citibank or JP Morgan and we'll negotiate with them as to what their placement fees would be. But we also say to the bank if you”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“And one of the things we have to do, the one we care about is equity returns. All these other metrics are interesting. If you're delivering consistent high cash flows to the equity and not eroding your portfolio,”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Even if I'm not an investor in CLOX, on my iPhone even, I can see the portfolio and all the trades last month in that CLO, even if I'm not a party to the CLO. So the richness of the data, there's no more transparent pooled investment vehicle than a CLO. Imagine you could call Fidelity and say, let me see the blotter on Magellan for last month. No, they'll give you a schedule of investments as required by law, but you don't get the trades. We actually get the trades. So we can see what's going on in every single CLO in the market. And then we can translate that to how much equity distributions are getting paid. And we can heat map any single collateral manager by any reasonable metric how much COVID exposure do they have, how much metals and mining, how much portfolio turnover, how much are they pushing sell versus just getting pay downs, things like that. Every COO collateral manager is above average. It's a total statistical anomaly.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Ted, it's all the above. It starts by knowing the people. In a while, probably once a year we have a team come in. We don't know any of the people. And between both my senior partners and I, if we don't know any of the people, we're probably not going to invest, but we'll take a look. It's free to look. And, you know, you never know maybe there's a diamond in the rough. But having the advantage of having worked with the folks for so long, you see firsthand that person on the plane could have been easily on their third movie and, you know, getting some sleep. You get the DNA of the people and understanding that, who's checked out, who's bought a new boat, who's got the new place in the vineyard they're going to? It's finding that group that has the DNA and that's only from personal interactions. And then overlay a quantitative analysis. They can be hard worker, but results pay the bills, not effort. We have tremendous amount of data. We own a software company called Valatana, which started out as our internal analytics, and it has the data now on every CLO in the market.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Always work for the owners in any enterprise. So that's some of the stuff we try and filter out of getting to the CLO collateral managers who have the DNA to deliver consistent outperformance to the equity. It's nothing to do with a high risk portfolio or a low-risk portfolio. We have CLO portfolios of all different flavors. 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.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's laughable. The meeting would just end, and that would be that. And while we respect our creditors, you don't ever take advantage of them because they won't lend to you again. There's a balance. We'll pay them back at our convenience, within the terms of the documents. And it's very interesting. Only about 20% of CLO collateral managers really share that DNA of appreciating their trying to deliver returns for the equity. And it's uncanny the number of times people say, oh, well, the debt is so important. And it's important.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Credit trained for nine months. I'm sure it was a brutal class. And if you probably didn't get a good grade, you got fired. I think credit training is like a webinar they do on their phones on the weekend now at a bank. So it's a little shorter than that. But in the old days, it was proper credit training. Many CLO managers work for the debt in the CLOs. Think of it. And you'll say they're credit trained. This is their DNA. And some of them even go so far as to say, well, the debt does put up 90% of the money, so I'd better make sure to take care of them. No private equity sponsor would ever invest with a management team who says I'm going to work for my creditors.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“And while it might not be the most fun person to travel with, it's a great person to invest with. And we see that kind of behavior. And we know these people over 20 to 25 years, most CLO managers trace their roots back to manufacturers Hanover Trust. That's where the loan market began under Peter Gleisteen and Jimmy Lee many, many years ago. And there's some strengths and weaknesses from that. But broadly that loan group, you could probably go back to the 1988 analyst class at Manny Hannie or something like that, and you can trace most of those people run CLOs today. Our job, just like any private equity sponsor, is to know the management teams in our industry. If you invest in FinTech, you'd better know all the appropriate management teams that know who's doing well, who's on the up and coming, who's maybe it's not working. We know that in the CLO markets. We know our issuer teams very well. One of the things that irks me about them, these folks were”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Because we have meetings, of course, when we land. My travel companion, who was a CLO manager, I was a banker at the time, he was my client. He's reading credit memos the whole darn way. Okay, have a good night. Just so you know, the first meetings at nine o'clock, be ready. We land at six, we'll shower and get right to the first meeting. And you watch how someone behaves like that. And I want it to be well rested because I want it to be sharp for the first meeting. This individual wanted to. Study the credit memos because he was going to do a credit committee from 7:30 to 8 30 when we landed.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, I'm going to use some words that sound a lot like a private equity process versus a bond process here. Now, the end of we buy fixed income securities, they're traded on the fixed income desk, they're on the mortgage key on Bloomberg. We have a proactive outbound origination process. This is when we're creating new CLOs. I'll talk about when we're buying secondary CLOs shortly. Proactive outbound origination process. There are about 120 active collateral managers in the market. We have firsthand personal relationships with all of them. And just like at a bank, there's executives that make all the decisions and go home every night. CLOs have collateral managers that make the decisions on a day-to-day basis. And they go home every night. And one of the things was actually on that road show in Singapore when I was signing an agreement to set up Eagle Point. I was with a collateral manager. And that's the longest flight in the world getting to Singapore. I might have lovely food on Singapore Airlines. I was going to have a glass of wine and go to sleep.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“A little more of an opaque market where you need to be in the club to be able to really outperform. And we are and we are in spades. So it was an inefficient market. Scale. People were afraid of it because of the name of the damn thing. Forget about the actual merits without looking at the data and something where insiders we think could persistently outperform. So that all came together perfectly. I believe that $250 million was at the time the largest single commitment ever made to CLO equity. That was a pretty gutsy move on their part as well, and they've been well rewarded for it. But those attributes don't exist in too many markets once you overlay the inefficiency and dispersion of outcomes that were able to influence significantly from here. So what we began as, we'll start, let's get the 250 to work and hopefully we'll grow. Now we have billions and billions of dollars of CLOs of just the”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, using the Dartboard School of Security Selection, you really had a struggle to lose money if you could hold the securities through the cycle. If you sold at the bottom, you sold stocks at the bottom, you've lost all your money. You sold anything at the bottom, you're going to lose your money. The CLO asset class worked with very limited exception. If you stay with it the whole time, it was very unusual to lose money. Now, but the dispersion of outcomes was great from the 25th percentile to the 75th percentile, about 7% or 700 basis points difference in performance just in that middle 50%. When you look up and down, the tails even 10% wide of that on either side. So it was an asset class that worked. It was misunderstood. There's a ton of inefficiencies in the creation process. And in the secondary trading process, which our systems and processes are designed to capture, CLOs are not reported on trace, for example.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Was the easiest decision of all, actually. A majority CLO equity strategy is our principal business. We do some other things in CLO debt, but the CLO equity market to me is a grossly misunderstood market. People associate it with CDOs. People think it's the next harbinger of doom in many cases. The reality is 96% of all the cash flow CLOs created prior to the financial crisis had a positive return to the equity class, and the median IRR was fifteen percent.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“rather than pay a hundred million dollars or $500 million for a business. We put a few million dollars in in soft costs and we bought securities. Now the securities might have done bad or good. Obviously they did very well. We're fortunate. But the reality is the risk of loss was pretty darn low and the asymmetry of return on the upside we thought had the potential to be tremendous. They've been extraordinary partners over the last decade and we set this up on a two-page term sheet. I remember I was in Singapore at the marina bay Sands Hotel on a roadshow and we shook hands on a two-page term sheet and I've never looked at it since and I don't believe they have either and that's the highest compliment I can pay them.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Each other. It literally was from that first meeting to the day we hung our shingle was one year to the day that was 10 years ago. We got to know the team and what was very unique about the team at StonePoint, and they're a large, well-regarded private equity firm with billions and billions of dollars of capital under management. They had backed 29 other new businesses. 28 of them had thrived. When I looked at that, I said, these folks have an extraordinary track record of getting involved with creating new businesses. And from their perspective, and wheat management had to chip in, they made us chip in not more than we'd like, but you had to wince a little bit, but that's the right answer. That's absolutely the right answer. Success was the only option, and they're very good at finding that threshold. But the amount of working capital we had to put in our business was a few million dollars. By the time we got up and running and everything, we had some outside money and the capital was generating fees for.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Whatever reason, right or wrong, I think that's a reality of that world. What they will do is pay 12 times multiple on next year's Pro forma doubly adjusted EBITDA and things like that rather than just put their money in some hard assets that'll deliver hopefully a double-digit return. So as I was scouring for a private equity sponsor to build our business, not a cedar, but a sponsor, I came across the folks at StonePoint Capital through a mutual introduction. And I had a full baked business plan that looks remarkably like Eagle Point. Our first name was Bank Road Capital Management, but one reason or another I think that name was taken. Naming a firm is one of the most challenging parts of establishing a firm. I met with the team, they had said they were looking to create a business and they wanted to sponsor a business that would be involved in investing in CLO securities. I said, well, I'm looking for a sponsor to help back me to create a business to invest in CLO securities. And as we got to know...”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Part of the way to do that is being very visible to the market that you've got that scale of capital right out of the gates. And we've been blessed. Our scale of capital across all our vehicles has grown. But I was kind of beyond the scope of what a typical fund cedar would be. So I really needed to find my way into private equity to find that kind of money. We were looking for a quarter billion dollars. Now, if you talk to most private equity firms, very rarely do they like to get involved with new companies? And very rarely do they like to put their funds money in securities?”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“You heard two extra. There's no real disadvantage to be a majority investor in a CLO, except that you need a lot of capital so you can have a diverse portfolio of majority positions. And as I mentioned earlier, I literally saw the report yesterday. We now have 101 majority positions across CLOs. But let's say you could convince someone you've got this great idea and you're the best guy to do it. The average new fund cedar probably $50 million, $25 million. We'll leave the money with you for a little while and see how it goes. That was not sufficient to demonstrate the point that I believed we could make and we have subsequently made of that an investor enabled with a scale of capital and a deep understanding of the inefficiencies of the CLO market could persistently outperform the market.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“The stereotypically when those opportunities are the best, and you can imagine, right, we're in the depths in early 2009 and things are starting to recover, that's typically when it's next to impossible to raise capital. So great idea to invest in this asset class. How did you go about forming a business at that time?”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“The debt is worth 50. It's hard to see the equity worth original cost. And these nuances, but these things sort themselves out over time. Some investors can disguise Marx for a period of time, but the opportunity to buy CLO equity cheap on the secondary Often from people who looked at it and said, I don't know what this is or the prior person bought it. Those were some of the things that proved to be the best investments you could have made. And owning those securities through the darkest days rounded out my experience. I was originally fixed old broken things, saw what you shouldn't do, created new for a while, and then own stuff, in many cases that I had cooked. In really hard times and saw how it behaved as an owner and put all of that experience together led to the ideal timing for formation of Eagle Point.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Sure. And I was working with some Australian investors at the time. Their superannuation program there, which is for Americans, we would call it mandatory 401k. I think it's up to 12% of all salaries are mandatorily put into the self-directed plans. What a great idea. We should have that here. But what that means is a money manager is just by law money's coming into your accounts every single month. So we had a lot of CLO equity and it was a group I had sold a lot of securities to when I joined them and had worked with them. And frankly, what we saw were some of the best opportunities then were to buy more CLOs. Now the marks were way down. That stinks. No one likes when your portfolio is marked down. It was interesting. We had one company where we were an investor in the private equity fund and they had the equity of that company marked at PAR, yet our CLO was a lender to that same company and the debt was marked at 50. I could see the look through. And I said, well, one of these marks is.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“So I want to circle back to this idea that you really haven't had impairment with these portfolios. And take me back to how that played out through the financial crisis. And then what did you do as a result?”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Ranger things have happened, I guess, but it's so far it hasn't, and I think with good reason the banks are pretty darn comfortable and they'd have to default at once as well to have that really be an issue. So banks buy it in the United States, some Japanese banks, some European banks buy insurance companies like a lot of the middle part of the capital structure, and then more hedge funds down to the triple B and Double B area, and different investors have different appetites, some like new, some like used, and there's different pros and cons of each. There's a rich and robust market if there's probably 750 to 800 billion of CLOs outstanding in the United States right now. In the debt classes, hundreds of investors all around the world who are interested in different of those at different times.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“So on and so forth. And then those securities, the AAA and AAA and so on down the line, are sold to different types of investors. The AAAs are commonly bought by banks and insurance companies. There's never been an impairment in the history of the CLO market on a AAA or AA security issued. Not saying it can't ever happen, but the severity of credit loss that would need to occur is such that there'd be far greater issues that could break these things. They typically have 35% credit enhancement to the AAA level. And if you think about companies recovering 50 cents on the dollar, you'd need 70% of corporate America to default.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Our leverage doesn't have that feature. It certainly amplifies the returns up and down, but it doesn't ever force us to put in money or sell assets on a bad day. So you have to understand the terms of leverage to evaluate the risk of leverage. In the case of using short-term repo financing or overnight repurchase agreements or margin financing, you're subject to the whims of the lender on almost on a daily basis. And when things go down, lenders make phone calls. They're not the most happy calls to receive or make, but that's what happens. We don't have that in the CLO market. So when you look at the leverage, you have to understand the terms. So that's very good. And then what's the A versus the B? What's the C? How does that come to be? That's an art with the rating agencies. And each of the big rating agencies use different methodologies. They come out with similar results, but not the exact same result.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“There was a couple of pros and cons with leverage. If things go well, it enhances your returns. If you buy a stock on margin and it doubles, you've made four times your money if you did it that way. Obviously, if it goes down, your broker is going to call you up and have you send in money or liquidate your position if you're not happy. Leverage the risk is it can make you do something you don't want to do on the day you don't want to or the day you don't have the ability to if you're out of money”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“The other way you hear banks getting into trouble, and it is probably part of that other 70%, is just leverage, the sense of leverage. You mentioned getting that long dated financing on the right side of the balance sheet of a CLO. How does leverage work both in getting that broad financing and then the tranching of the liabilities for the CLO manager?”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“That suffered the run on the bank even as recently as 2008 is significant. 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 longer than my longest asset. So I can see everything through if I need to and not worry about marks. Now no bank has ever figured out how to do that, how to borrow on a long-term basis and lend out a short-term, but also lend at a high rate and borrow at a low rate. And we figured that out in the CLO market.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Investment Group companies do have problems, at least you're first in line. Loans are weaker today probably than they've been in the past, but you're still first, and you'd always rather be first than not first when things are bad. So you put that formula together, you have an asset class that's delivered positive returns over 90% of the years in the last three decades. You put that in a CLO structure, and in a bank, once you get past the things that can go bad with the business side of things, and a lot of commercial banks have 30% of their assets and loans, 70% is everything else. A CLO just has 100% of its assets and secured loans to American companies. The right side of a balance sheet, if you were to look at any major money center bank, they'll have 60 to 70 percent of their liabilities due in a year or less. This is your in my checking account, a savings account, other overnight CP they might use. Admittedly, they have the Fed window, and I think that probably makes some people behave differently in the future, but the number of banks”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Last 10, 15 years banks get in trouble for opening branches, opening accounts and branches that people don't know. Accounts are being opened, the London Well, or some other derivatives business or some other silly thing that some employees did that they probably should not have done. Very rarely are banks brought down due to their secured corporate loan book. When you think about the history of banking, but that's pretty unusual, that the senior secured corporate loan book was the thing that brought the bank to its knees. The loan market has a track record going back about 30 years. The credit suise 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. Truly remarkable, these are below investment grade assets. These are risk assets, yet because their floating rate, you don't have really much rate risk, and they're senior insecured so that when things do go awry and below”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Have zero dollars in the principal account on the day of determination, and you know that day is coming, and it's very easy to manage your portfolio if you've left money in there, you're probably asleep at the switch and probably not someone we're investing with from Eagle Point. Now interest goes into another account. And again, that's paid out quarterly. On the same day, we did that principal waterfall. And as long as we're passing all of the over collateralization tests, the AAA gets their interest, which today might be LIBOR plus 250 on a new CLO. The AA gets their interest all the way down to typically a double B class. 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 percent on an annualized basis. It's a bank, just with that retained earnings. Now, if you think about when banks get in trouble, if you look back in the history of the”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Sure. So interest in principle comes off, and just like in any securitization, the trustee puts them in tooth as an interest account and a principal account. We're really getting to the nuts and bolts here, but I'm sure you have a few securitization listeners who will love this. The principal, with very limited exception for the first five years, just gets reinvested by the collateral manager back into replacement loans. Could be new loans or secondary loans. There is one exception. There's something called an overcollateralization test, and this can impact a principal account or interest account. If on the day of measurement, which is there are four days a year, these are measured quarterly, the other 361 days of the year the OC tests do not matter. But on these four days, if you're failing your test, which is a ratio of par of assets versus liabilities with some adjustments, if you're failing that test, any principal in the principal account would need to reuse to pay down the AAA class if you're failing the test. Now, a good collateral manager will”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“The way no one can pick 150, 200 below investment grade credits and get everyone perfect. But you have a market mechanism typically to reinvest to make up your problems.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“By definition, you're going to get a couple wrong, no credit picker is going to be able to pick things perfectly, but you have a diverse portfolio, no one industry or no one company can bring down a CLO. And for the first typically five years of a CLO, any loan that pays off, any loan that defaults and recovers, whatever you get, or any loan the collateral manager or servicer goes to sell, those monies get reinvested back into additional loans. Now, sometimes it's better to buy new loans with a little bit of OID and everything breaks up and it's a hot market and everything pops on the break. Other times like today, where the average loan is at about 92 cents on the dollar, you take those par dollars and you go buy things that are on sale. So different, whatever you buy might vary depending on the market, but you've got that closed system, all of that principal just keeps getting reinvested for the first five years. There's going to be some mistakes.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Sure. So within a CLO, there's again picture a bank in your mind. The only difference is there's no retained earnings and there's no risk of a run on the bank. But the CLO has assets, which are all senior secured loans to American companies. These are large companies. You do business with every day at Comcast, Cable, Assurion. And we have a diverse portfolio of them, typically one hundred fifty or two hundred different loans in a given CLO.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Love to dive in on effectively the unit economics of a CLO. And why don't you walk through the full instrument, both the asset side and the liability side, just to level set this idea that, okay, there's repayments and you can reinvest.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“10% of your portfolio, 12% back at par. You can go buy stuff at 70 cents on the dollar. And certainly by 2009, you could re underwrite the winners from losers pretty clearly. Most of the surprises were known at that point. And what turned out to be the 2006 and 2007 CLOs, the vintage medians from those periods, far outperform 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 locked up capital, not worried about mark-to-market triggers, and were able to thrive, such that the average CLO beat the base case by about 4% per annum on its IRR. Truly remarkable.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“And there's a couple of things that happen. Every loan that doesn't default pays off at par. It's a binary outcome for every credit instrument. There's only two things that can happen at the end. And even if 5 or 10% default, that means 90 or 95% of them will pay off at par. Now, those par payoffs happen randomly for different reasons. A big investment grade company buys a small below investment grade, takes it in, just pays off the old debt, whatever it may be. Mortgage people talk about prepayments all day long, CPR and things like that. CLO people really talk about default rates. How many loans are going to default? The prepayment rate, in my opinion, is far more important. And even in 2008 and 9 on average, 12% of loans paid off at par each year. Back then, the loan market was in distress, as were all risk assets, and they were trading at sixty, seventy cents on the dollar. But if you're a CLO manager, you're getting money back.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Came and structured products in general went the wrong way. What I knew, and I don't think a lot of people appreciated, and many people said, well, loans are garbage and some of the LBOs from 2006 and 2007, like Tribune and TXU, some of the worst hits of that vintage of credit excess, were all in the CLO ecosystem. The CLOs buy all these large cap syndicated loans. And I knew there was trouble in the loan portfolios. There was no doubt about that. But what I also knew is CLOs could keep reinvesting.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, this was 2002, 2003. Thankfully, the world was straight up for the next five years. Sadly, good ideas are very hard to keep secret on Wall Street. And very quickly, everyone in the brother figured out the trick. It took everyone a little while and we had a head start for sure. But all of a sudden, people wanted to buy old equity. And how can I build to control? There were very few majority investors back then. Today, Eagle Point has majority interest in over 100 different CLOs across our firm, but back then it was very rare. So you'd have to build up these positions. I kept staying and doing more and more and more of this. There were some big reorgs at the bank when Bank One came over. We've all been a big banks and big changes happen from time to time after a brief stop at Bear Stearns. I ended up at Merrill Lynch. And that was a great spot. And we did many of the same things and repeated that same playbook and built out a fairly big CLO business for Merrill. Then, of course, the music stopped. And late 2007, early 2008,”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Win-win-win. For us, we made a trading profit on the old stuff. We made a big fee on the new deal. So that took months and months to do. Last year, I think our team did 37 of those corporate actions. What took us probably three to six months to get done ages ago. We think that was the first time it happened where someone exercised majority rights in the equity of a CLO. And that's now commonplace today, but it was one of the first times where people really exploited these options that are given to the equity holder, which are not typical in any other form of securitization.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Was great, and all of a sudden we got pulled to par and we made millions of dollars. Of course, that had the adverse effect of ending the fees to that collateral manager. And very few people like to have their fees ended. They called up and maybe used some not-so-nice words, but said to us, you know, what the heck are you doing? I'll save you the hard words. We have a relationship with the bank. How dare you do this? And we just said, well, why don't we do a new deal with those same assets? That's a great idea, friend. Brilliant. Let's go. And a few months later, we were able to print a new CLO for that firm. They lengthened their AUM. They got a higher fee in the New Deal.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source
“Up and said, Hey, would you mind buying this equity piece I have in my portfolio? I've just taken over the book. I don't understand it. I think it's a bad time in the credit cycle. And we look through it and it took us a little while to figure out how much it was worth. There was not a lot of trading back then, and we figured we could liquidate it for about 50 cents on the dollar. So we showed him a bit of 40. And they accept it. Okay, that was interesting. So we have something that we think we can get 50 out of that we're getting a significant discount on. So then we went out and tried to buy up other securities in that same CLO to the point where we then had the majority of the equity class and we exercised the right to call the CLO.”
2022-12-01 · Capital Allocators · Thomas Majewski – Empty Rooms: Masterclass on CLOs at Eagle Point Credit Management (Capital Allocators, EP. 284) · IDENTIFIED FROM THE TRANSCRIPT · source