Richard Walker

Equity Distributions with High Cash Flow CLO Equity is having another stellar year. Reported IRRs for CLO Equity: ~15% YTD for many of the top CLO managers. CLOs start with a warehouse line allowing CLO managers to accumulate/ramp their BSL portfolio of performing & highly diversified loans (~200 BSLs when CLO is priced). The most favorable CLO warehouse lines have non-marked-to-market facilities with roughly 4x leverage. Bank facilities provided with favorable terms are about SOFR +125 to +150bp range. During the warehouse ramp, equity seeks to earn 20-30% IRR, but this can vary widely, however it’s for a short period (~3 – 6 months), so the MOIC is low as it’s just a component that drives the overall CLO equity return. The BSL market is performing well. I expect the credit markets to perform well in this environment with default rates for BSL declining in the coming year, which should prove positive for CLOs debt and equity. AAA CLO tranches represent about 60% of the CLO cap stack and AAA’s have tightened to ~+130 from its wide earlier this year of S+150. The CLO equity arb is driven by the difference between the rate earned on the BSL portfolio vs. the liability costs (and admin costs). Holding all things constant, tighter liability costs are accretive for CLO equity investors. Credit selection and asset management is critical to performance as the best CLO managers employ dedicated teams of investment professional’s expert in loan underwriting, building, and managing highly diversified CLO portfolios. Strong credit profile is key to maintain low default rates, and its best to avoid CCCs, as mitigating risk is critical to performance. CLO equity also benefits from reinvestment during the investment period, active management that can add alpha via relative value, and repricing/extensions of CLO liabilities later in the CLO life span. CLO equity holders earn strong current cash distributions for well performing deals, with the potential to earn mid-teens IRRs, strong DPI and MOICs. The added kick is when the CLO manager shares a portion (10-20%) of its management fees they earn from managing the CLO (~40 bps) with the CLO equity investors. This fee sharing arrangement was first introduced post-GFC when CLO managers raised CLO equity funds required under risk-retention requirements as The Volcker Rule was introduced. Since the Volker rule no longer applies to U.S. CLOs, fee sharing arrangements are less prevalent today, but available from select managers. For these reasons and more, I am a proponent of CLO Equity and believe there is a place within in broader portfolio to hold these high yielding assets. Big shout out to Marathon Asset Management's CLO team who just closed Bryant Park 2024-24, a $405M CLO yesterday, bringing Marathon’s CLO capital market transactions to $2.4B YTD.

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Scrap AiM? Things are really hotting up in the war of words over London's junior market. "The UK’s capital markets are “not fit for purpose” and require “radical surgery”, the report from the Tony Blair Institute for Global Change and the centre-right think-tank Onward said." “Aim has failed in its stated purpose of providing a home for scaling businesses. It should be fully merged with the LSE’s main market, with a special route to listing specifically for high-growth firms in emerging technology sectors. Sorry to say, but I believe that is also wrong and it's not AiM's fault. The solutions put forward are always structural, like merging AiM with LSE makes it all better. The reason that companies are not going to AiM is that it is expensive and the reason that investors are not interested is because it's boring and has been engineered by the regulators to be so. Let's say you start a brokerage to specialise in AiM Securities because you and your investors are passionate about UK businesses and they have a risk tolerance. Firstly you will have to plaster your website with risk warnings about the hideous dangers that lurk in these horrible little businesses... and that, more than likely, you will lose all of your money. Then, when something inevitably happens with one of these small businesses (which is the nature of trading in small businesses), something the management has done but is nothing to do with you.....you will spend months justifying why you allowed people to invest in the business which was clearly a bad and dodgy business.. because the FCA have the greatest hindsight risk management tools you could imagine and will bring those to bear. ..and if they come for you as a Senior Manager you could be personally liable. So, my friend, would you build a business in the UK to allow people to bet on small UK businesses when you can just just take your coms from people trading Tesla? CEOs could not give a monkeys what you call the market, what the structure is or where it is frankly. They want the best deal for their shareholders in costs to list, cost of the ongoing compliance with regulations, liquidity and access to capital. Reforming the structure of UK markets is a start but it will not save them, reforming how people invest in them will. The reason AiM was great in 2006/2007 was that it was exciting. Shares going from 3p to 30p was not unusual. There was a community of investors ripping companies apart and building them up. Like it or not, risk capital is in competition with Crypto because crypto is more exciting. It is, of course, monumentally more risky, and one would have thought the FCA would prefer you gamble on a UK business swinging for the fences than a frog meme coin created by a kid 'for lols'? #AiM #LSE

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ESTR Futures and Liquidity... Two different exchanges, two different approaches. A question I'm fielding a lot is, where is the most liquidity? My attached grid shows outrights and the basis side by side for each expiry. ICE, the leaders by Open Interest at first glance appears to have the liquidity. What I find interesting is that each exchange has a different approach to their stacks. ICE has adopted the pro-rato model. This encourages you to show more size to do more trades. Eurex is using FIFO, first in, first out. A queue system that means should you want to trade you are rewarded for keeping your interest in the book as you make your way down the line. The question is which is the better way? #markets #futures #option #estr #ice #eurex

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The lack of real-time controls... https://lnkd.in/e-7jcB5C What's most revealing to me is this line "Because most were intraday trades this had not been detected straightaway, the person added.". If the cadence of your control systems fails to match the cadence of your trading then you're exposed to significant risk. This is not just about the controls being real-time, it's about the data being real-time too. Are organisations equipped with real-time distribution of the data that underpins these controls? The answer is all too often "No". So by the time the data is available, by the time the control eventually runs, the trade is already closed out and the organisation is often none-the-wiser to the intraday risk they were exposed to. T+1 will no doubt expose similar issues and as AI based decision making becomes more prevalent the lack of realtime data to underpin the AI models will cause further issues. At Gresham we firmly believe that If you're not upgrading your data game now, you're signing your own market death warrant.

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Over at the blog (market-thinking.com) and the more mobile friendly substack (marketthinker.substack.com) we look at the market mechanics behind the early August sell-off, initially attributed to economic data but subsequently conceded to be about the yen Carry Trade. In our view it has been about an unwind of the three big anomalies of the early summer - low Vix, low Yen and high concentration risk in US equities. However, the demand for a Fed pivot (again) and a rally below 4% yields on 10 year Treasuries threaten another anomaly as bond traders revisit their rate cut obsession.

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The reliably interesting Joachim Klement covers MiFID2 in his excellent Substack today. For a suite of regulation that cost tens of billions to implement, I have never heard one positive thing said about MiFID2. Unfortunately, Joachim doesn't buck that trend and instead points out the research showing how it has led to increased costs and reduced liquidity. Perhaps someone can explain how MiFID has improved my life. https://lnkd.in/dTVUKZqb

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Coming into the end of the quarter and ahead of China National Day we saw some new announcements by China that sent the stock market vertical. However (not investment advice) while a welcome shift against relentless negativity is to be welcomed, we see more of a short covering spike than a real turn in underlying investment flows. This 'bazooka' analysis comes from the same people who breathlessly brought you the 'Pivot' this time last year. The truth is that neither of the world's two largest economies needs or is going to get monetary stimulus. Important stuff is happening, but it isn't this. More at market-thinking.com and the marketthinker substack.

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Ether continues its march to $4,000 and beyond. With staking gains can be compounded. But how should we think of staking in terms of financial risk and reward, how do we model potential returns from staking? The CF Benchmarks team offers up its risk and reward model for ETH staking:

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2055 is only 30 years from now... A report, published by the UK's Ministry of Defence, offers a forward-looking analysis (to 2055) of the key drivers and trends likely to shape the global landscape over the next several decades summarized as: Global Power Competition: The global balance of power will shift as state and non-state actors compete for influence. Major powers like China and Russia will play pivotal roles, but smaller states and entities will also seek to assert themselves. Demographic Pressures: The global population will continue to grow, but at uneven rates. Rapid population growth is expected in regions like Africa and South Asia, while many developed nations will experience aging populations or declines. Climate Change and Environmental Pressure: Climate change will result in more extreme weather events and environmental stress. Efforts to mitigate its impact will dominate national and international agendas, especially as competition for resources intensifies. Technological Advances and Connectivity: Rapid advancements in data processing, AI, automation, and connectivity will affect virtually all aspects of life, shaping industries, economies, and power dynamics between nations. Economic Transformation and Energy Transition: The shift toward greener energy and the digital economy will create winners and losers, as some societies adapt more quickly than others. The availability of key resources, such as critical minerals, will become increasingly important. Inequality and Governance Pressures: Rising inequality driven by technological disruption and concentrated wealth will exacerbate governance challenges. This could lead to societal tensions and greater pressure on state institutions to reform. The report also highlights paradoxical (complex) trends... a) Increasing global connectivity and growing fragmentation due to shifts in value chains and protectionism, b) juxtaposition of innovation with stagnation in addressing global challenges like poverty and migration. c) Rise of authoritarianism contrasting with growing demands for transparency and accountability. The summary above denotes the major global drivers of change from the report that are deemed to redefine societies, economies, and governance systems. What would you keep, add, remove? #FutureTrends #GlobalStrategy #ClimateChange #TechnologicalAdvances #EnergyTransition #GlobalPowerShift #Inequality #Governance #Demographics #AI #EconomicTransformation #Sustainability #Innovation #DigitalTransformation #StrategicForesight

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Over at the market thinker substack we try to avoid politics, but with the snap election tomorrow we ask 'Who is running the country?' The electorate is about to tell Sunak it isn't him, as likely will the French tell Macron on Sunday. Meanwhile the part of the US electorate that believed the media telling them Joe Biden was 'sharper than ever' are now angrily asking the same question. The populous are unhappy with this form of 'democracy' and are pushing back against incompetent incumbents, which is heightening uncertainty for investors. Investors meanwhile also want competency, but also stability, leadership, vision, a plan to deliver and capital commitment. Currently this only appears to be available outside the 'west'. https://lnkd.in/eYUb5TYb

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For those not aware, i run a Technical LONG list at Fundstrat called UPTICKS named after Sir Issaac Newton's OPTICKS newsletter from the 1500s. #UPTICKS stock Axon Enterprises ($AXON) has successfully broken out above its 5.5 month base which had been building since March-- The stock is higher by over 17% today and one can see the importance of having exceeded $326 which has been tested on three separate occasions since this past Spring. A very good move and volume likely could double its 30-day avg by end of day. Given the momentum and daily and weekly bullish range, upside targets lie initially near 367 and above that can allow for a move up to 424. Overall, a very bullish breakout for this stock today, which should lead to further gains into September. Come pay us a visit if you are not yet onboard https://lnkd.in/eCrsVbUu

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🚀 Reward Distribution is live on EigenLayer In July I penned a research report for Twinstake looking at how EigenLayer is currently placed for institutional requirements. https://lnkd.in/eyZbtk_g The TL;DR was that whilst it’s a very exciting project that has captured the interest of the retail market, there remains many open questions and updates for institutions to be ready to put their ticket sizes into restaking. One element I specifically noted was around the rewards distribution mechanism since, until very recently, any restaking activity on Eigenlayer was for points accrual only. However as of August 6th, EigenLayer is now live with their rewards distribution mechanism so that AVSs can provide rewards to restakers and operators. 🔎Let’s dive into the details of this …. As noted above, until this point, any restakers were accumulating points for staking their ETH to an AVS (or to multiple AVSs). There were some markets where these points could be traded (e.g Whale Market) however in general restakers were simply watching their points balance increase but with no immediate utility. With this upgrade AVSs can now set: 🕜 The time period for which rewards are valid (e.g this can be all the way back to the M2 upgrade to ensure that current AVS restakers do not move their stake to a live reward distributing AVS) 🪙 What rewards amount is paid out depending on what assets the restaker is delegating (e.g if a user is staking EIGEN they may get higher rewards than someone staking a liquid staking token) 🚀 The token the reward is paid out in. This can be any ERC20 token and is likely to be the native asset for the AVS in order to stimulate their ecosystem and to have funds to pay rewards from. Eventually this will be a multi-token payout structure. Rewards are calculated on a daily basis however they are visible 2 days later and there is a further 7 day activation delay for when the rewards can be claimed. There can also be up to 7 days for the ‘proof’ of the rewards to be submitted onchain - leading to a potential 16 day delay to claim rewards. Operators are capped at a flat 10% commission and will only have rewards distributed to them for each full day they have opted in to validate the AVS. It’s important to note that currently no AVSs have rewards distribution enabled. EigenDA is expected to be one of the first and others will likely switch this functionality on over the coming quarters. In addition to this protocol level upgrade, the EigenLayer UI now also shows restakers and operators the rewards they have accumulated and can claim. Interestingly, EigenLayer’s reward distribution notice on July 26th mentioned that they had ear marked 4% of the EIGEN supply as a ‘reward-boost’ to supplement AVS rewards and to pay out for AVSs who haven’t yet enabled reward distributions. Possibly this idea has been superseded by the retrospective rewards functionality or it will come later.

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Genuine question for fellow QT nerds / financial plumbing experts. The BoE MPC voted to keep the pace of Quantitative Tightening unchanged at £100bn for the next 12 months, c. 90% of which will come through a passive run-off of existing holdings, and c. 10% from active sales. Bank reserves are currently upwards of £700bn, well above the BoE’s own estimate of even the £490bn upper bound of the Preferred Minimum Range of Reserves (which should delineate between what central bankers have started calling “abundant” and “ample” reserves). In other words, by the Bank’s own reckoning, it should have lots of room to shrink its balance sheet before bank reserves start to become scarce. Fine. However, this is happening against the backdrop of exponentially growth in banks drawing on the Bank’s Short Term Repo (STR) facility – not something you would expect in an environment where every bank has “abundant” reserves. If you were sitting on the MPC, would this give you pause? Are there any risks associated with moving out of "abundant" territory too quickly, or are gilt-backed reserves just going to seamlessly get replaced with repo-backed reserves?

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Quo vadis JPY? #jpy #usd #boj #trump The JPY remains in investors’ cross hairs but the recent moves in the JPY crosses look like a market speculation that is increasingly detached from FX fundamentals: 1️⃣ The JPY-selling continues despite evidence that the gap between global rate and yields and JGB yields is shrinking fast; 2️⃣ The more aggressive the JPY depreciation the likelier it is that the BoJ would hike and reduce the pace of its QE further; 3️⃣ The BoJ/ MoF are once again inching closer to intervening in the FX market. What also seems to be flying under the radar is the fact that: 4️⃣ The long-end of the JGB yield curve is inching closer to 2% - e.g 30Y is already trading above 2%, 20Y is at 1.92% and 10Y is close to 1.1%. 5️⃣ JGB long-terms yields @ 2% should make JGBs high-yielding assets according to our clients and encourage Japanese lifers to repatriate. 6️⃣ A 'weak USD' doctrine could be the bedrock of a potential second term for Donald Trump that could complement the US protectionist drive. For more on that, please see my latest interview with Stephen Sedgwick and Karen tso.

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Subscription traps, enabled by card-on-file, have been a real problem for a long time (nearly 10m of the 155m active subscriptions in the UK are said to be unwanted!). It's great to see the Government (Department for Business and Trade) acknowledging this. Variable recurring payments - which focus on user permission and clear mandates - can solve this. See our blog from 2022 in the comments. Unfortunately, VRP for subscriptions is just out of reach, because the Payment Systems Regulator is insisting on a pilot of other use cases first (looking at direct debit substitution, rather than cards). Hopefully, now we have the #NationalPaymentsVision - there will be some unblocking and joining up, so we can put open banking to use here soon. https://lnkd.in/efZJwnH8. #NPV #VRP #payments #subscriptiontraps

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The western narrative on China is constantly observing the destruction side of creative destruction without observing the creative bit. Ironically, while the west tries to stimulate its economy by manipulating prices - interest rates, exchange rates and energy costs - China has been allowing the pricing mechanism to deliver capital to where society needs it, before moving on. The property developers were a solution to a problem - the need to move 150m from the countryside over 10 years without favellas and townships emerging- and their funding model allowed the local governments to deliver the necessary infrastructure around it. Their job done, and the system evolving into one of speculation, it was shut down, to howls of pain from the western investors who had bought the developers' equities - and particularly bonds - and yet ignored the warning from the Chinese authorities that the game was up. Key lesson is that China is growing its economy according to its own economic logic - it is not following western rules and any investors assuming it will do needs to listen to what China says, not what western pundits say it should do, The article linked was originally published on livewire in Australia It's not the first on this topic and won't be the last...

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STRIP MALL DEAL UPDATE 🏬🏪🍕 Here's an update on the latest non-performing loan we acquired in our fund (numbers are rounded for readability) We acquired this loan in May and will have title next week I underwrote a more conservative 9 months so we're beating the base case nicely We could have taken title sooner, but didn't I'm going to explain our strategy below: I bought this loan knowing that the payoff was considerably more than the asset value Post-close we sharpened our pencils and arrived at a payoff over 8mm after a thorough review of the loan docs We sent the borrower a letter advising them of their default and the total amount due The borrower offered us title we could've done a deed-in-lieu of foreclosure in a month but We pursued a stipulated foreclosure (a friendly court process) instead for 2 reasons: 1. conveyance tax 2. future tax appeal 1. CONVEYANCE TAX 💸 conveyance tax is the tax paid on the transfer of property different jurisdictions treat conveyance to creditors differently in terms of levying conveyance tax going foreclosure saved us 60-75k 2. TAX APPEAL 📄 One reason the asset struggled is property taxes are 50% higher than neighbors tenants are NNN, but higher property tax means we need a lower base rent to compete a foreclosure judgment will help us show the taxes are too high that's why we went with a stipulated foreclosure instead of just taking the deeds We also got the contents of the operating account which was around 100k What did the borrower get out of it? The borrower was released from their obligations under the note which may have included personal responsibility for the deficiency A deficiency is the difference between the debt and the collateral value the debt was 8.5mm and the collateral value only 5.5mm; a 3mm deficiency Before getting into the real estate game plan, let's review the numbers: We're stepping into about 1.25mm of equity above our basis (note purchase price + legal - account surrender) This is a great start and we're running ahead of schedule, but we believe there is even more juice in the real estate play THE REAL ESTATE PLAY With a little capex and leasing, the center could be worth closer to 7.5mm let's dig in: Current rents of 19 PSF NNN are below market, but the existing leases don't roll off soon we have two vacancies 1,300 sqft standalone 8,500 sqft at the end of the center we signed an LOI for a ground lease with a coffee franchisee to demolish the existing 1,300 sqft space for their own multi-lane drive thru Despite being a fraction of the sqft, this increases base rental revenue by 20% Assuming we can fill the other vacant 8,500 sqft at 17 psf, the stabilized value at an 8 cap is ~7.5mm - If you like this kind of deep dive into CRE debt, give me a like/follow - if you know someone who needs 8,500 sqft in CT on a prime retail corridor shoot me a DM - If you want to learn about our fund click the link below https://shorturl.at/bLqk7

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https://lnkd.in/eY3-AmYM will MoF walk the walk!?.. #JPY strength to play through opts. A very decent chunk of 5s and 7s UST auctions coming up, #SPX500 nearly achieved ideal correction level 4800-4900 range, mega cap earnings and PCE coming up - #highfrolonger still in play, core inflation could actually end up closer to 4.5% towards q3 2024.. QQQ ideal correction more towards 16K, the growth vs value rotation only just started #assetmanagement #qualitybalancesheets

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From the Financial Times this morning: "US investors have stepped up funding in European defence technology start-ups, accounting for the largest chunk of private capital flowing to the burgeoning sector this year amid a rise in global conflicts. The US provided more than 65 per cent of venture capital defence tech investment in Europe so far this year, according to Dealroom.co data, up from 18 per cent in 2023. The increase marks a sharp reversal from the previous year, when more than half of VC funding for defence tech in Europe came from domestic investors." Get the full report on Dealroom.co / reports

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