Tranche Talk — Navigating CLO trading technicals with Performance Trust’s Alex Navin

In this episode of Tranche Talk, Cloud 9fin’s CLO series, our global head of CLOs, Tanvi Gupta, talks with Alex Navin, managing director at Performance Trust Capital Partners.

They discuss how CLO tranches are trading in this macro backdrop, triple-A liquidity, the influence of vintage on CLO trading, relative value between the US and Europe and how this pocket of volatility is different to anything we’ve seen since 2020.

They also delve into the uncertainty surrounding uncovered double-B MVOCs, the year ahead for CLO equity returns and if there are any equity hedges out there.

Have any feedback for us? Send us a note at [e-mail]. Thanks for listening!

Creators and Guests

Producer

Chase Collum

Head of Podcasts for 9fin Limited

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Tanvi Gupta: Hello and welcome back to Tranche Talk, which is the CLO edition of the Cloud 9fin podcast.

I'm Tanvi Gupta, the Global Head of CLOs at 9fin, and I'll be your host for the day. We're going through turbulent times, to say the least. And in this episode, we're going to deep dive into the world of CLO trading to get to the bottom of how CLOs are making their way through this volatility.

Joining me today is Performance Trust's Alex Navin, who will help us navigate these times. Alex, would you mind introducing yourself to our listeners?

Alex Navin: I focus on trading CLOs at Performance Trust. I spent most of my career on the trading side, having started my career at Citi, and then spent a little bit of time on the buy side as well as a portfolio manager focused on CLOs.

This is what I do day in and day out.

Tanvi Gupta: Perfect. Let's start with the state of the market, which I know is a heavy subject, but we'll try and figure out how CLOs fit into this.

Over a billion on TRACE data and over 300 million in BWICs yesterday alone. In this macro backdrop, what do you make of the trading volumes as spreads widen out? Do you think CLOs have outperformed other credit products in the last week or so?

Alex Navin: In the last week or so, yes. There's a couple layers to that question. I would expect trading volumes to be picking up while volatility picks up. And to some extent, we've seen that. I think we've seen that a decent amount in seniors.

And the market has really taken triple-A CLOs to be a product that's useful across all seasons. I think it's a product that's stood the test of time, so it's got mass adoption now across money managers, insurance companies and, of course, the biggest buyers, banks.

So when you see volatility pick up across asset classes, we're seeing volatility everywhere, whether it's commodities, oil, rates, et cetera, you tend to see a lot of selling of the product where you can raise cash easily. And when we're seeing a lot of selling of seniors, what that's essentially telling us is that there are clients who are de-grossing their exposure in the product where they can get the best liquidity.

I think one of the things that's been relatively surprising so far is that, as we've seen both fundamentals deteriorate on the credit side of the equation for CLOs, as well as macro volatility with the global conflict that's occurring now, CLO triple-As are staying very resilient, very strong, and clients are able to sell very large volumes with very little notice and get incredible liquidity. And spreads have really been quite rational in terms of the way that they've been moving in the secondary market for seniors in particular.

Tanvi Gupta: And we'll touch on triple-As a little bit more in detail as well. I just wanted to know, do you think this pocket of volatility is different to the ones we've seen since 2020? I feel like we've had a few pockets in the last couple of years. How is this one different?

Alex Navin: Yeah, this one's different because with CLOs, it almost led the rest of the sell-off before we even had the global conflict in the Middle East. This story started percolating towards the end of 2025, when everybody started focusing on how Claude, in particular as an AI tool, was starting to disrupt the software industry.

In a way, the CLO market became a little bit of a leading indicator. The loan market started it, but then the CLO market, as the biggest buyer of loans, essentially took up that focus and started to re-underwrite some of the risks in the tails of the portfolios.

It came off the back of a year where, in general, it was a really challenging market for CLO equity and, to some extent, CLO mezz of older vintages. Over the years, you started to have a bit of a vintage effect where credits had been declining. We're getting to the end of essentially what might be a credit cycle because you had easy money back in 2021, and so we're five years, six years past that.

And of course, when you underwrote those loans back four or five years ago, you had different underwriting standards than what you did now. So as you get to the end of this credit cycle, people start to examine these things a little bit more closely.

This is all being done through the lens of which sectors have durable moats in terms of performance and which sectors are going to perform well going forward. But it's also in the context of a loan market that had been incredibly competitive because there's so much money chasing the product. So in 2025, you had a real story of haves and have-nots.

You had the loan market as a whole, as an aggregate, getting tighter and tighter and tighter, and that's really squeezing the equity arbitrage. So you had really terrible performance in CLO equity as a result of that. But you also had a tale of portfolios that were starting to sell off, and you started to see that more and more, particularly in the fourth quarter.

Some of the credit stories were idiosyncratic. Some of them had nothing to do with AI. And then some of them started to be pretty AI- and software-related, which I'm sure we'll talk about a little bit more.

Tanvi Gupta: Yeah, that was going to be my follow-up, basically. How are you taking a credit-specific view in the current climate, which I know you sort of touched on, but how has that translated into trading CLOs particularly?

Are you seeing a shift in the last month or so? Because obviously the software stuff happened last month, and now we're seeing the effects of it coming through. How has that changed the whole dynamics of trading CLOs? Do you think the focus right now is seniors, but will it shift to different parts of the cap stack?

Alex Navin: All of the investors right now are still trying to figure it out. If anybody is out there thinking that they have this part of the credit fundamental equation solved, I think that they're probably getting a little bit over their skis.

Many, many of our clients that we've talked to have started to do bottom-up analysis company by company. It's not very often that that is the case in CLOs. CLOs straddle this world where oftentimes there will be almost like a mortgage investor focus, where they just look at it as a statistical problem and they say, "Hey, I can look at this on subordination or MVOC or manager quality, and I can interview the manager and I can just trust them and see what they're doing."

Every once in a while, you have sector-specific problems that cause the investor base to want to re-underwrite the sector. The last time we did this in a really big way was energy in 2015 and 2016. To some extent, we also did it during COVID, where everybody was kind of re-underwriting hospitality, leisure, travel, sectors like that.

But right now, we have the investor base really doing its best to re-underwrite software. The problem with this exercise, and that's why I'm saying that the story is still current, is that the technology is evolving so fast.

The first wave of selling came in the fourth quarter when Claude released Cowork and Claude Code. That basically made it look like you could eliminate many coders and/or just make many coders that are already there much more efficient.

The second wave of concern for the software sector came with the release of OpenClaw in the beginning of this year. That basically opened everybody's eyes to say, "These things are advancing so quickly. You shouldn't have a massive leap in capability with just two months."

I think that opened a lot of investors' eyes, and this is not CLO-specific or loan-market-specific. We could also see that in stocks. There's an ETF that now everybody's looking at, IGV, which is a software sector ETF that's been underperforming the rest of the market.

That's what everybody is talking about right now. That was a huge topic of conversation during the conference in Las Vegas that the industry attended. And I don't think that this story is anywhere near done.

Tanvi Gupta: So it's like you take a view where you can and then just wait and watch, sort of something like that?

Alex Navin: I don't think so. I think one of the problems right now we're seeing is that having a view is extremely difficult. The cone of uncertainty is very wide.

So when you look at double-Bs in particular, when I ran the numbers at the end of last year, about 8 or 9% of the CLO double-B market in the U.S. was uncovered from an MVOC perspective, so had an MVOC of less than 100. That number right now is about 17%.

And what that's telling you is that you have almost 20% of the double-B market kind of underwater from market-value coverage of the loans that are there. Those won't necessarily take losses. There's a lot of reasons why they might not take losses.

But equally, you could look at the market right now and say, "Hey, stocks are actually still pretty close to all-time highs, credit conditions are still pretty good, unemployment is range-bound and everybody is well-employed, and yet we still have 20% of the BB market uncovered from an MVOC perspective. Doesn't that seem like it could get worse?" And I think the answer for a lot of people is, yeah, it does seem like that could get worse.

It seems like unemployment could tick up. It seems like people could start losing jobs. It seems like the Fed could make a mistake here with inflation picking up, and maybe they raise rates, and maybe that makes it even tougher for loans to get refinanced.

So it seems like right now we're standing on this precipice where there are so many things that could happen, and we've constantly got new dynamics being thrown into the mix. There's the macro issues, which again, conditions seem genuinely good right now, and yet still we're seeing distress pop into the market.

This is where everybody's really focused, like, "Okay, well, it looks like there should be some opportunities out there. It looks like some things are trading at relatively distressed levels, and yet the market still feels really strong, and yet people keep buying things at higher and higher prices, and there's tons of cash on the sidelines."

When some of those other things start to change, we could easily have an even bigger shift. So all the investors right now are trying to navigate essentially all of these things where you have cross-currents of macro, micro, fundamentals, re-underwriting individual credits, re-underwriting sectors.

Tanvi Gupta: It makes for a really tricky environment. So focusing on BBs and junior mezz in general, how is the bid depth and what's the liquidity like in that part of the cap stack?

Because obviously if there's more focus there, if you're talking about MVOC pressures and stuff as well, are people trading well and effectively to kind of take advantage of this?

Alex Navin: What's happening down there? Liquidity is also a story of haves and have-nots. Very much like the loan market, where you have a big chunk of the loan market where everybody has confidence in the loans, everybody has confidence in the credit, they think that the sector is fine, and a lot of those loans trade extremely tight. Every dealer wants to have exposure to that credit.

And then there are going to be credits where people just don't really want to touch it. That's very much the case now in double-Bs. Anytime you have double-Bs trading below 100 MVOC, which is now the case for 17% of the universe, you're almost always going to be above a thousand DM. That's kind of just a cliff that hits.

So when you went from last fall, with 9% of the universe below 100, to now 17% of the universe below 100, that 9% of the BB universe that fell below 100 MVOC would have traded down anywhere from 5 to 10 points, maybe more. So you're obviously having a lot of folks sitting on a decent amount of mark-to-market losses.

We have not seen selling in very big numbers for that type of paper. I think there are plenty of people who kind of want to get out of some of that risk, but are unwilling to take the mark-to-market loss that they now are kind of sitting on. These are double-Bs that would have been trading probably in the low 90s or high 80s at the end of last year and are now going to be trading in the 70s.

And again, when you're looking at that and you're saying, well, why am I selling a double-B in the 70s when the high-yield index is still really well-behaved, it's around 300, and the last time we saw something like this during the tariff Liberation Day last year, the high-yield index was also dislocating? So you had other things dislocating besides just the bonds that you owned. And this is something maybe we can talk about later when we talk about hedging.

So now, with the BB fundamentals having deteriorated, you have this world where folks who have plenty of BB money to put to work, and there's a lot of buy-side money to put to work in BBs, are being pretty much forced up in quality. The universe of super-high-quality BBs is relatively limited, and you end up with some chasing behavior. If you want to buy the best BBs that are out there, you have to be the best bid for those BBs.

What we're seeing is a real re-tiering and a steepening of the credit curve, where the best BBs are trading well and/or much tighter than they were a month ago, and the worst kind of BBs are still leaking wider and wider.

Tanvi Gupta: What about the BBs that are close to 100? So they're not quite below 100 yet, but if the macro climate kind of gets worse, then they might dip into that category as well. Are they trading, or are they kind of sitting and waiting to see what happens?

Alex Navin: Yeah, we have a number of clients who want to play in that space. And I think the interesting thing about that space is that you can actually, to some extent, take sector-specific views.

There are going to be some managers that have really big exposure to software. And that really big exposure to software is going to be the one and only reason that those double-Bs have MVOC between 100 and 102, call it. And if you're sitting in that world and you have a really big software exposure, and you've done your work to essentially look at what kind of software it is, and you have a view there, that's a decent way to play that space.

Because a lot of these can be long-duration BBs, they can still have 8% subordination, maybe they have no defaults in the portfolio, maybe it all looks pretty clean, but the dollar price of the loans has just moved a lot lower. So from a perspective of, can you see a mark-to-market rally if this software thing has been oversold, that's a really good place to play that.

And so we're starting to see that differentiation happening there, deals that might have a lot of convexity to the loan portfolio. I think the loan index is around 95 right now. If you have a deal with weighted average price below that, you have an additional convexity pickup to the loan portfolio in that particular deal versus something where your average price of your loans in that particular 101 MVOC BB is higher than the loan index and you're going to have less convexity there.

So in the instance that you have a rally in that market, you're going to have one that might outperform the other because you're going to have that kind of convergence or mean reversion on the credits that have sold off the most.

Tanvi Gupta: Of course, CLO equity is the elephant in the room in any CLO conversation. Is it an attractive trade at the moment, especially coming from a rough 2025?

Alex Navin: Very tricky question. I think it is selectively interesting.

Yes, 2025 was one of the worst years for CLO equity in a very long time. And I think it probably surprised many investors because you would not think that CLO equity should perform so poorly in a year where nothing really happened from a macro standpoint, or really from even an idiosyncratic credit standpoint.

And I guess, to reiterate for any listeners who don't know, the real reason for underperformance last year was spread compression. Because CLO equity is an arbitrage vehicle, what that means is that if the interest that's coming in from the assets that goes into the CLOs was essentially being reduced because all these loans in the portfolios were being repriced, the excess cash flows that are available to the equity holder were getting compressed, and in some cases getting compressed very dramatically. Then you're discounting that over a long period of time.

This is really how CLO equity investors get their returns. Just based on spread compression alone, the CLO equity market was off anywhere from, call it, 10 to 25%, depending on the deal.

And then this year, on top of all the spread compression, we had credit concerns that are starting to pop up. Everybody's talking about it. It's software. There are some other things that are popping up here and there. And once you start to have a big sell-off in the loan index in general, and you start to have sector-specific sell-offs, your equity NAVs also drop precipitously.

These are the two components that make up the cash flows in equity. You have an IO, the interest component, and you have a PO, the principal component. Last year, the IO got decimated, and this year the PO is down by anywhere from 50% to 75%. That's a real problem.

The good thing about the PO being down is that can mean revert. The IO, you can't really fix very quickly. As we were talking to investors at the end of last year, a lot of these deals were being almost artificially held at high prices because the NAVs were still high.

If you had a deal that had, let's call it, just to make up an example, an equity NAV of around 60, but the forward cash flows had been compressed, so instead of paying 15 points a year it's only going to pay you 10 points a year, that deal might still trade around NAV because everybody's like, "Hey, the NAV is still there and maybe I can reset it or refi it." So NAV was really holding those prices at sort of artificially high levels.

The NAV on that bond now is probably 30. It's going to be trading lower right now, no doubt. But the benefit there is that unless there's a real credit cycle, which is certainly possible, let's assume that most of those loans are actually okay. Most of those loans are actually fine. Your NAV could rally back to 50.

If you're able to pick that thing up, it's paying 10 points a year, you can buy it at 50, that's 20% cash-on-cash. You then have the ability for that loan portfolio to rally back to 50, maybe even 60 if you have full mean reversion. And you'll be able to make 10 points on that trade plus 10 points of cash flow. So it's a 20-point trade on a $50 price bond. It's actually really attractive from that standpoint, from the ability to mean revert.

And that's a big change from where it was last year, where we looked at the universe and we said, equity has been a terrible performer, but there's no catalyst for it to change.

Obviously, from the end of last year to now, equity prices are off pretty dramatically. And there's a lot of different ways to estimate it, but I would make an estimation of anywhere between 15 and 30% down this year, year to date.

Tanvi Gupta: Is there a good hedge for CLO equity out there? We're hearing some investors are putting hedges on. What's your view? Do you think it's a good idea?

Alex Navin: I think it's really tough because they're two different trades. There's not really a one-for-one asset class that's going to give you good hedged exposure for CLO equity.

The instruments that have historically been popular are CDX IG or CDX High Yield, the credit default swap indices for corporate credit. One of the problems that we've seen this year, and this has always been a problem with those indices versus the loan market, is that the borrower base is pretty different. In high yield, there's barely any software, and same thing with IG. So the sectors that are represented in those credit indices are quite different than the sectors that are represented in CLOs. So getting that broad-based macro hedge right is extremely tricky.

It also wouldn't have worked last year. Last year, CLO equity was off dramatically and credit indices were stable to slightly better. And one of the reasons for that, as we talked about, was spread compression, and spread compression in the loan market actually happens when the market is rallying.

There's sort of this almost negative convexity component where the better conditions are for credit, the worse it kind of ends up being for CLO equity at the tail end of that experience. So you're not going to be able to hedge in that particular environment without essentially diluting your returns.

My general view is that CLO equity is better done as a long-only strategy. But that's not to say that there are not folks out there who are employing relatively smart strategies to look at hedging very specific things.

Some general ideas of what that might be are that you might not want to have a large just kind of credit beta hedge on, but you might want to have something that looks at credit vol. There are some folks who buy vol because when vol picks up, that's going to be a way to make sure that when your CLO equity exposure is being hit, because of whatever reason, you might build a benefit there.

And another thing that some smart folks look at is single names, where you can get a lot cheaper protection, single-name IG, single-name high yield, and you can express it in very specific sectors or very specific names that might have problems.

But again, is this a hedge or is this a trade? I think that's debatable. The more complicated that you have to get, the more it is more like a pair trade than it is kind of an outright hedge.

So again, in general, I think that it's not that it's completely unhedgeable. I think that it is just that you end up having exposure to an asset class which is at times very uncorrelated to what CLO equity returns are doing.

Tanvi Gupta: Okay. That makes sense. And kind of going up to the seniors, there's a lot to talk about when it comes to triple-As. We're seeing good liquidity and yet not too much ETF outflows. So is it an attractive trade? Because it seems like it hasn't moved while the rest of the cap stack has moved quite a lot.

And also on ETFs, how come we haven't seen big outflows here considering the macro environment? And is that something you guys are anticipating? Sorry, there's too many questions in one question, but you know what I mean.

Alex Navin: Let me try to unpack those one at a time. I started talking about triple-As at the beginning. And I think one of the interesting things about the asset class is that throughout, call it the last five to seven years, the investor base there has really changed. And I think you're highlighting that in the fact that now there are ETFs that have a lot of exposure.

And I think the markets in general have also changed, right? We have retail investors who have, let's call it whether or not they're increasingly sophisticated, I think they actually do have reasons for what they're doing. Through things like Wall Street Bets and all those people YOLO-ing options, I think they've gotten a little bit more respect from institutional investors and everybody who says maybe retail actually has reasons for what they're doing and they're actually smart about how they're thinking about the product.

I think it's great that retail has exposure to CLO triple-As. I think CLO triple-As are a genuinely good asset class, and they provide much higher returns for the risk than almost any other asset that's out there.

And what we've already seen this year is we've seen investors able to de-risk a huge amount of AAA, sell it into the market at very attractive prices. I think for maybe a week there in February, CLO AAAs were trading in the 99 handle, but never lower than that. And I think everything is much closer to the high 99 handle or par today. And even in CLO primary, we haven't seen spreads move very much this year.

All of this kind of makes sense to me when you think about what's happening from the credit standpoint. Let's just use round numbers: if 20% of the CLO exposure is software, I think that number is probably a bit high, but let's call it 20% somehow exposed to the AI trade, and half of that ends up defaulting for some reason, so you have a 10% default rate across the CLO universe, that's not going to have any impact on your triple-As. You have 35% to 40% credit enhancement. You're going to have diversion from your interest diversion test or your double-B OC test failure. Your CLOs are essentially not exposed to this software mania. Why would anybody sell triple-As just for that?

What people were selling triple-As for is to get exposure to other asset classes. You can sell triple-As and get exposure to Resi, for example. And there was a minute when Resi was trading a decent amount wider this year. So there are a lot of folks who will do that, including banks. Banks can get very good capital treatment for triple-As, but they can also get amazing capital treatment for buying Resi.

And so you have that rotation happening, which is just very logical from the investor standpoint of saying, "Hey, I'm going to sell this asset class because it's not moving, it basically still trades at par, and I can go buy Resi, which might be fixed-rate." You also get some exposure to rates and you can play swaps and some other things that you can do there that were a bit more dislocated really than triple-As.

So triple-As, I feel like, are now becoming this asset class where folks are like, "Oh, I want a bunch of triple-As so that when things get crazy, I can sell them at 99 and a half and go buy something else that's off a lot more."

And so we're starting to see that more and more from insurance companies, from money managers, to banks to some extent, and now retail. We did see some outflows from these ETFs when things were starting to get a bit volatile. But what then happened after that is that we got a big rally in oil prices because we have this big disruption to the oil supply in the Middle East. And that's probably going to drive inflation, right? This oil supply problem is fundamental to fertilizer, food prices, transportation, people flying around, travel and vacation. So there's going to be a lot of knock-on effects here that I think are starting to get priced in.

I think rate cuts are starting to get priced out of this year. And if you have stable and/or higher short rates, it's actually great for CLO triple-As because it's a floating-rate asset class. So you're not going to have SOFR coming down. That's when we usually see outflows in loans, and we usually see outflows in loan ETFs and loan mutual funds. I think what the retail investors have done so far has been pretty logical, which is let's hang tight, because we might be in an environment where rates are staying where they are and/or maybe even going higher from here. So CLOs are actually a great asset class to hold on to.

Tanvi Gupta: Okay, that makes perfect sense. I wanted to kind of ask you about the vintage effect that's at play. So how are the older deals trading, and is it like a blanket rule that all the deals are just something to sell? What's your view on the yield curve? And I kind of wanted to bring in whether you're seeing any manager tiering in any way as well, or is it just about the age of the deal?

Alex Navin: Yeah, I mean, I think I'll start out with a hot take, which is that any time a deal gets reset, as a debt investor you're probably supposed to pass.

I think resets, they're great for CLO equity, right? Being able to extend out the cash flows for a long period of time. And listen, if you're buying a reset triple-A, you're going to be fine. But over time, these portfolios are going to accumulate credit losses. It's inevitable.

Especially if you have a manager who does not clean up the portfolio during the reset process, which they could, they just simply choose not to, a lot of the time you're going to end up with a portfolio that looks much, much worse over time. And this has happened again and again.

I don't have the stats broken out, but of all the double-Bs that are below 100 MVOC, I can't imagine any of them were new issue from like two years ago. All of these are going to be deals that were issued in '16, '17, '18, through 2021 and have been reset since one time or multiple times.

And a lot of this stuff, we are going to start seeing a much stronger vintage effect because of where underwriting was done in each of those parts of the market environment. So 2021 is sort of a strong example. Rates were zero. Money was easy to come by. Everybody was flush with cash.

It doesn't even necessarily come from the CLO market in general. It comes from the broader LevFin universe, so private equity companies out there selling from their portfolio or doing LBOs or take-privates or M&A, and all of these being done at competitive multiples or multiples that might not make sense, or on EBITDA that's essentially never going to turn into real earnings, or assuming revenue growth that doesn't come to pass.

So all of those things were reasons why there have been plenty of people in the broader press talking about how there was a lack of underwriting discipline. But that's not necessarily specific to the loan market in general. It's broader than that. Where was the discipline in private equity? Where is the discipline in all of these other things?

When you look back at some of those vintages, you're almost inevitably going to have people who threw more money at things that didn't work because they had more money to spend. There were meme stocks, there was crypto, there were all sorts of things that showed that there was a lack of discipline from the investor standpoint when those market conditions were around. That stuff's definitely shifted.

I do think that there's a really strong reason to stay in a current vintage for CLOs, even if you have to give up spread. If you're really going to be disciplined about how you're investing, I think the best way to get exposure to an environment right now, and I think we already talked about this trade to some extent, is if you can find BBs in the 102, 103 MVOC now, look at the ones that have relatively new portfolios instead of the ones that have old portfolios.

The old portfolios, the reason that they're down there is because they've had credit losses over time. And the new portfolios, the reason they're down there is just mark-to-market sell-off on the loans. They may or may not default at this stage. So there are, at this stage, just quite different versions of what it looks like to have a lower-MVOC mezz bond, whether it's a triple-B or double-B.

Tanvi Gupta: Okay, cool. That makes sense. And I know you were a London native yourself at one point in your life, so what's the relative value play between the U.S. and Europe right now? Is anything particularly attractive across the pond?

Alex Navin: Yeah, there's a couple things that kind of stand out. AA tranches and single-A tranches in Europe trade a decent amount wider than they do in the U.S., and some of that is structural. I think that there's sort of a strong insurance bid in the U.S. that keeps AA tranches and single-A tranches relatively tight, which is not the case necessarily in Europe. I don't think that they work for European regulations on the insurance side as well there.

From a credit-quality standpoint as well, Europe has been benefiting from a decent amount of reshoring of manufacturing. There's a lot of discipline obviously right now in terms of European leaders not wanting to get sucked into the broader conflict in the Middle East. So I think from a bit of a macro standpoint, even maybe from a credit standpoint, it's likely that there's slightly higher quality there.

But European CLOs are going to get pulled into the software mess that the U.S. CLOs have as well, just from a relative-value standpoint. I think even if the highest-quality U.S. BB tranches are off 50 to 100 basis points, which they still are this year, I think they were printing as tight as the mid to high 400s at the beginning of the year, and now they're closer to the low- to mid-500s, or 500s, for the best stuff.

The European BB tranches are going to be that much wider as well, because those markets are going to be linked by the investors who look at both sides. And I think that there's also this general take that everything is still trading relatively well. So we've seen some investors in Europe take off a decent amount of risk, and that's driven spreads a decent amount wider because, again, once you get to all-time tights, especially hedge-fund-type investors in Europe and in the U.S. who are playing in both markets, will look at it and say, "You know what, I'm not being compensated anymore for the risk that I'm taking. I want to have some dry powder and I want to take some chips off the table."

Tanvi Gupta: What is undervalued and mispriced right now? Any dislocation that investors should take advantage of? It could be a particular trade, or it could just be an asset class or a tranche in particular. Yeah, any tips?

Alex Navin: Sure. I mean, as much as I've said that triple-As have been well-behaved this year, I think that's probably to the detriment of the asset class, to be honest.

I think that triple-As have a bit of a structural bid from Japan at the moment in primary, and that's keeping a lid on spreads, even in secondary. For all those reasons, I look at the triple-A market and, to me, it seems like a good place to probably sell a bit and raise some cash.

It does seem like spreads could go 5 to 10 to 20 basis points wider and get to the 130s, 140s pretty easily in a market where you start to have persistent volatility, which we might have this year.

I think we've already talked about a couple of trade ideas that I think are relatively interesting in the double-B space. I do think that there are portfolios that have been sold probably too much just based on the software-sector-specific view. Everybody's going to have to take their own credit-specific view on how software is going to develop.

I think that there are certainly some parts of the software sector that are going to go away. I think it's inevitable there's going to be defaults. So now it's not a matter of whether that's going to happen. It's a matter of magnitude and whether or not you can do the work as a credit team to figure out which credits make sense.

I think if you have a piece of software that is serving a limited number of customers and is relatively low touch and is relatively easy to replicate, then it's almost certainly going to go away, get automated by some of the tools that are out there. If you have something that's really broadly used and is relatively unique and is plugged into customer data, then it's probably going to stick around.

Even if you have something that's going to survive, there's still a bigger question about the terminal value on what some of these software companies should trade at from a multiple standpoint. So even if you have a software company that's going to survive, maybe when it comes to 2028, when there's a maturity wall for all of these loans, you're going to have trouble refinancing it, and you might have to take a haircut even though the company is still okay.

So for all these reasons, I think that there's going to be some credit dispersion that picks up, and we've already seen it, and it's already happening. Generally, mezz is an okay place to take views on credit dispersion because you're going to have the ability for managers to focus on what credits they like and what credits they don't like.

And I think that this probably leads right into my strategy view on what managers you want to pick this year. I think some of the much bigger managers that are out there, that have typically benefited from economies of scale and big credit teams and access to the best primary loans that are out there, are going to struggle to pivot their exposures.

Just think about some of the biggest managers that are out there. If you have an outsize exposure to an individual software loan, what's the actual bid there? I think your MVOC is going to be quoted on a two-by-two market on the loan. If you wanted to sell 150 million of that particular loan, could you do it? I think the answer is no, because you're not going to have another CLO take you out of that amount.

This is an environment where a middle-sized manager, with a strong credit team and with strong fundamental analysis, is going to have a bit of an advantage in at least being able to pivot around this market, because this is not a market where it's just a big macro sell-off and you can rotate loans around. It's really sector-specific. It's really loan-specific. And if you're overexposed, there's kind of nothing you can do to change that right now.

Tanvi Gupta: Sounds like the perfect note to end the discussion on. I mean, it feels weird to end on something when I know the last bit in itself could be a separate podcast, but that's something for another day.

Alex Navin: Thanks, Tanvi. Hopefully you'll have me back.

Tanvi Gupta: A hundred percent. No, this was such an interesting discussion. I genuinely could have just kept going. But thanks so much for joining us and shedding light on the state of the secondary market. I'm sure everyone's going to really appreciate what you had to say.

Alex Navin: Yeah, of course. You're very welcome. Thanks again.