Software Loans Are on Sale | Matthew Bloomfield of Palmer Square Capital Management

CLOs are structured to absorb defaults and de‑leverage through embedded triggers and tranche subordination, while offering granular, loan‑level transparency across roughly 300 borrowers — features that make CLO equity and senior tranches resilient through stress.

Episodes of severe volatility have historically created attractive entry points for CLO equity: managers bought loan portfolios at multi‑point discounts, reinvested paydowns, and later captured outsized returns — a playbook being reenacted as managers eye a potential sourcing window around Q3 2025.

Liability‑side moves drive most CLO equity returns — wide liability spreads (new‑issue CLO BBs in the mid‑500s) can create compelling entry yields even though AAA spreads have only modestly widened (roughly ~115bps to ~125bps year‑to‑date).

The loan market’s mechanical dynamics — ~20% annual prepayments and borrower repricing roughly every six months — enable managers to ‘build par’ by reinvesting paydowns into discounted loans, increasing the collateral base and future income even if market marks show volatility.

Public BDCs’ monthly NAV transparency and tradable marks create higher measured NAV volatility and wider public discounts that likely overstate underlying losses, presenting what the manager calls a multi‑year buying opportunity; Ares is cited as a favored, well‑run public BDC to own.