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News Investor’s Corner
‘We are trying to discern who has a moat and who doesn’t’
by Shant Fabricatorian
Creditflux: Software loans and AI were the leading topics of discussion at the recent SFVegas conference. How concerned are you about software exposure among your managers?
Laila Kollmorgen: Software and AI were part of our discussions with CLO managers at SFVegas. The general consensus is that it’s about the risk of disintermediation with AI. A lot of the discussion was around which credits were more or less protected by a moat — regulatory barriers or maybe proprietary information.
That impacts enterprise value. If it has been trading at a 17-20x multiple — and in reality, it’s more of an 8-10x — that means your valuation has changed. Your LTV has gone up, and when you put that in conjunction with where sponsors are if they need to put more money in, will they do so? If not, you’re looking at a credit that will go through an LME. What does that mean? How much value is being taken out of the company because of the LME due to how much advisors cost?
This is the year of trying to discern who’s got a moat and who doesn’t. 2027 is going to be a question of whether these companies can secure refinancing. 2028 is the maturity wall for a lot of software companies.
It is unwise to move out of certain software and tech names and into chemicals
Laila Kollmorgen
Portfolio manager
PineBridge Investments
CF: As someone who has navigated numerous dips in markets, does the pace of disruption in the current wave strike you as particularly unusual?
LK: Every disruption is going to be a little different, but when you take a look at a lot of research about technology, initially there tends to be a very slow take-up, and then it goes quickly. We have a lot of companies that are talking about how they’re going to implement AI — how they’re looking to create efficiencies. It’s a question as to how it ultimately gets adopted, and what kind of efficiencies can be made.
CF: As a credit investor, do you think there is value in taking a strong view one way or another on the speed of that adoption?
LK: I think most people will tell you that what’s important is to make sure you’re constantly re-underwriting the risks that you have in your portfolio, as well as taking a look at where there may be potential opportunities. Nobody wants to catch a falling knife.
What we try to focus on is managers that do good credit selection and are prudent risk managers. It is about how quickly and how early one takes a look at selling out of a credit.
One thing we find a little bit unwise is when we see managers moving out of certain software and tech names and into chemicals. Chemicals is not in a good cycle — just because chemical names have been trading up does not necessarily mean they are good investments now.
It’s one of the things we saw over 10 years ago when managers sold out of oil and gas and bought retail. Retail wasn’t doing well. Yet that was the swap that you saw a lot of managers make.
It’s going to be painful because it’s going to look as if managers are building par, but in reality, they’re not. They’ve simply gone from one poor credit into another. We’re going to see real par losses and a lot more pain at the equity level.
CF: Elsewhere in this issue, we’re looking at the continued strong interest in launching new CLO platforms. Are you enthusiastic about investing in new platforms? What do you look for?
LK: I think that when we take a look at new managers, it really is about the platform that’s being built with the quality of the people that are being brought on board, from the portfolio managers to the business development side, the traders, and the number and quality of credit analysts.
There are new managers we will not touch because we don’t feel they have enough people or they don’t have the right people. That’s very important to us, along with the question of whether they have enough equity for five to six deals. [We look at whether] that will put them in a position of actually establishing a platform. And then ultimately, what’s their ability to withstand some volatility?
