LevFin Lens – Q&A with Flat Rock Global’s CIO Shiloh Bates

In an exclusive LFI interview, Shiloh Bates, CIO of boutique alternative credit manager Flat Rock Global ($1.4bn AUM), discusses the dynamics within the private credit and middle market CLO space. The increase in leveraged buyout financing costs and rising SOFR rates since 2022 have influenced private equity activities, creating a noticeable gap between the prices private equity firms are willing to pay and sellers’ expectations, which has impacted LBOs and new CLO creation. Bates notes the challenges in filling these CLOs with a sufficient number of loans despite strong demand for CLO securities.

Flat Rock highlights the strategic shift in loan movements between broadly syndicated structures and private credit. While some loans transitioning to private credit may present advantages, others reverting to broadly syndicated structures pose challenges. The broadly syndicated market offers competitive financing rates that may attract private equity firms.

Flat Rock discusses the impact of tariffs, observing that middle market CLOs, involving smaller U.S. businesses, generally have less foreign exposure, thus reducing tariff risks. Furthermore, the basis difference between BSL and private credit CLOs is highlighted, with middle market Triple As typically offering a premium. The potential emergence of new managers in the market and strategic considerations for manager tiering and hybrid CLOs suggest a dynamic environment poised for continued evolution.

LFI: What is top of mind for you as a credit investor?

Flat Rock: The deal flow for underlying loans in the middle market CLO remains crucial. Since 2022, leveraged buyout financing costs have risen. SOFR and loan spreads over SOFR increased, reducing private equity activity…