Thomas Majewski: Yes. So the big driver right now holding back or why is the primary arbitrage not so good or out of whack with a secondary market opportunity for CLO equity right now for a number of reasons, the CLO AAA market is out of sync with the loan market to some degree. And we have to buy loans on the same proverbially the same day as you issue CLO AAA debt. And that right now is a little bit out of balance. While the risk retention rules were repealed in the United States or overturned back in 2018, a small number of collateral managers still have access to captive capital. And in our belief, based on all the CLOs issued in the first half, new issue CLOs first half of 2023, the vast majority were taken and placed into these captive funds.
We used the, , less return sensitive. We’re trying to be polite. I’ll admit when we say that. But there’s a handful of issuers that have access to that capital. The math is unambiguously — I can’t imagine there’s any controversy amongst market experts that is such a gap between primary and secondary. These things have occurred from time to time in the past sometimes secondary is cheaper, sometimes primary cheaper. They don’t usually — they’re not usually this pronounced and they don’t usually — historically, they’ve not been persistent. They do continue for a period of time. I think we’re probably turning the corner and that differential is reducing, but it’s still going to be there for a little while. There’s not enough buyers of AAA CLO paper in the world right now for certainly large ticket primary new purchases.
And to the extent there are not new issued AAA spreads will stay wide. In many cases, another example is secondary CLO AAAs trade type to primary CLO AAAs. And why is that the CLO AAA market for new issue is often dominated by investors who can take $100 million, $200 million, $300 million chunks of CLO AAA versus the secondary market might trade between $5 million and $50 million bite sizes. And just the dynamics of the market. There’s not a deep enough bid in many cases, to get together a syndicated AAA across smaller investors. So those markets kind of stuck dealing with a smaller number right now of large ticket buyers, but a few of them are not actively buying. So it’s just — there’s more supply than demand, so the AAA stay wide. These situations have occurred from time to time.
But again, in my experience, they haven’t persisted for extended periods of time. This one is amongst the longer periods, frankly. That said, there’s somewhere between $800 billion plus of U.S. CLOs outstanding. A big chunk of that is in the form of CLO equity. We have no shortage of investment opportunities in the secondary market. We remain very selective in the things we go after, but there’s no shortage of opportunities in the secondary market as well.
Paul Johnson: That makes sense. That’s very interesting. And last question, kind of along the same point or sort of a segue, I guess, I’d say, but direct lending CLOs are something that we’ve heard about relatively recently. I’m not sure if these are things that you can potentially invest in or not. I’m just curious if there’s any sort of trend that you’ve observed at all in terms of direct lending, CLO issuance, just obviously, with a lower kind of leveraged loan volume that’s out there. That’s the trend that you’ve noticed? Any sort of commentary you would have there, if any, would be interesting here?
