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~$12bn of private credit loans refi'd into the BSL market this quarter which matches the record set in 1Q'24 But look who's actually leaving. Of the 18 borrowers, only ONE was B- (the rest were B/B+). So if you're a decent credit, you can almost certainly get cheaper money elsewhere. Source: Pitchbook/LCD

CLO Equity $ECC delivered Q2 results which were comparatively good for the fund after a tough 18 months. Over Q2 the NAV was up 8% (though it gave back 3% in July). The rise in the NAV, according to management, was because of a rebound in loan prices and CLO Equity valuations. Previously, the impact of AI on software borrowers along with geopolitics, weighed on loan prices. Here is where the logic breaks down a bit. Later on the call, management said that one of the most significant headwinds for CLO Equity over the last 18 months was loan spread compression i.e. loan price gains due to the imbalance in the supply/demand picture. So on the one hand you have a rally in the fund’s NAV because of a bounce in loan prices and on the other hand you have a longer-term NAV drop because of higher loan prices. This obviously doesn’t make much sense. The best way to characterize this is to say that a rise in loan prices can have a positive immediate effect on CLO Equity (which are essentially a portfolio of loans) but can also have a longer-term negative effect because CLO Equity is a leveraged long/short i.e. long loans and short CLO Debt. Tighter spreads on loans lower the amount of carry generated by CLO Equity and because CLO Equity is not a par instrument (i.e. unlike a loan or a bond it does not repay a par amount to the investor) its price is a function of the amount of carry it will earn till maturity. This is why a drop in the “arb” or net interest can have such a large negative impact on CLO Equity prices. More on this in our Morning Note.