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Eagle Point Founder and CEO Tom Majewski details the billions of CLO inflows into ETFs and what happens when that changes (0:15). No landing in a growth world, bullish outlook for corporate credit (2:25). This is an excerpt from a recent Investing Experts episode.
Transcript
Rena Sherbill: Tom Majewski from Eagle Point (NYSE:ECC). It’s really great to have you on Seeking Alpha.
There’s such a preponderance of ETFs. It’s such a big part of the market right now. What are your thoughts moving forward? How do you navigate within that new paradigm, within that new reality of so many ETFs, how do you think about that moving forward as a CLO?
Thomas Majewski: In the CLO [collateralized loan obligations] market today, ETFs own what I would approximate to be about 2% of the total amount of CLOs outstanding, principally concentrated at the AAA part of the capital structure.
So if we’re down at the equity and BB part, we’re down at the bottom. We get the most return in a typical situation, but have perhaps the greatest, greater risk of loss. These folks sit up at the top of the capital structure have, I don’t believe there’s ever been a CLO AAA that failed to repay principal, or even fail to pay timely interest, so a different risk profile.
Certainly, the price of the securities can move up and down. What we’ve seen so far in general are lots and lots of inflows into the ETF world for CLOs. I think research I read said over $10 billion just in 2024 alone.
So that’s good actually for ECC in one way, in that that’s creating a lot of new demand for CLO AAAs. And as we’re the equity, we like the spread on AAAs to be as low as possible because therefore we get more equity distributions to us, which we like.
Now, one day that will change. One day, these ETFs will have outflows and investors will say, for whatever reason, decide to take their money out of the CLO, ETF AAA ETFs and those ETFs will have no choice, but to sell. Not because the portfolio manager is making the decision, but because the shareholder is making the decision for them.
When that happens, spreads will widen on CLO AAAs and that’s less good for everyone involved, frankly. But that’s kind of a natural evolution. When we bring daily liquidity products into a market, it’s great when the inflows are there, but it’s less great for the market when they turn to outflows.
RS: Anything that you feel like we left out of the conversation that you want to share with listeners?
TM: We’re in a growth world here. There’s going to be a little volatility based on commentary in the market. But we’re set up exactly the way we’re supposed to be in markets like this. We’re in a pretty good environment.
Lots of people talking about soft landing, hard landing. Seems like we kind of had no landing, and our outlook continues to remain quite robust for corporate credit. Invariably, there’ll be twists and turns that come our way as credit investors.
But in these strong markets where we’re able to get in and rip out costs on the right side of our balance sheet, we’re quite optimistic for the prospects for our investment strategies in 2025 and beyond.
We think the United States is set up very well, and nearly all our investments are here in the United States. The economy doing far better than I think many people predicted. Corporate defaults remain quite low and, touch wood, spreads continue to tighten, which we’re able to capitalize and lock in for long periods of time in our investments.
So we’re pretty, pretty bullish on where we sit in the world. There’s going to be ups and downs for sure, but net, we think the answer is up into the right, which is always the right direction.
