“Overblown” Sell-off in Software Loans | Matthew Bloomfield on Public BDCs (Business Development Companies) and Collateralized Loan Obligations (CLOs)

Episode Summary

Executive Summary: Matthew Bloomfield of Palmer Square Capital argued that public BDCs, especially PSBD, are being mispriced because markets are penalizing transparency, lower spreads, and software exposure even though the firm lends to larger, higher-quality borrowers and publishes a real monthly NAV. He also explained how CLOs work, why recent volatility can actually benefit CLO equity, and why public credit may offer attractive value versus private credit and other alternatives.

Main Topics: PSBD valuation vs. private-credit BDCs (Priority: 5/5): Bloomfield said PSBD trades at an unjustified discount because its NAV is transparent, its loans are tradable, and its portfolio is concentrated in larger borrowers with better access to capital than smaller private-credit names. Software and AI disruption concerns (Priority: 5/5): The interview focused on whether AI risk is overblown in software lending. Bloomfield said market selling has been concentrated in software loans, but PSBD’s direct software exposure is modest and the true disruption risk is lower than investors think. Public BDC sell-off and buybacks (Priority: 4/5): He attributed the public BDC drawdown to lower base rates, rising credit-cycle anxiety, AI fears, and pressure from non-traded perpetual BDCs. At current discounts, buybacks are highly accretive and a key capital-allocation tool. High yield vs. leveraged loans vs. private credit (Priority: 4/5): Bloomfield explained that high yield has migrated toward double-B quality, while private-equity-backed borrowers are more often financed through loans and private credit. He said high yield is still too tight relative to risk. CLO mechanics and equity returns (Priority: 5/5): A large portion of the conversation broke down CLO structure, tranches, liability spreads, and why market volatility can help CLO equity by enabling cheaper reinvestment and par-building. Static CLOs and private-credit CLOs (Priority: 4/5): Bloomfield described Palmer Square’s static CLO innovation and noted the firm is expanding into private-credit CLOs, which have wider liabilities and less liquidity but follow similar structural logic. Credit quality, defaults, and restructuring (Priority: 3/5): He said non-accruals remain low and that most defaults are driven by operational or balance-sheet stress rather than fraud, with First Brands cited as a rare exception.

Key Arguments: PSBD deserves a higher valuation because it owns mostly broadly syndicated loans, offers monthly NAV transparency, and lends to large borrowers with average EBITDA above $400 million. Public-market prices reflect real loan marks, while private-credit NAVs may be less observable and potentially stale, making public BDC discounts look overly severe. Software sell-offs are concentrated and likely exaggerated; software is embedded deeply in business workflows, so AI disruption risk is not as immediate or universal as feared. Broadly syndicated loan portfolios are not inherently riskier than private credit; they may be safer because they are more liquid and more transparent. Buybacks are currently one of the best uses of capital for BDCs trading below NAV, though managers still have to balance that against origination needs. CLO equity can benefit from volatility because managers can reinvest paydowns into loans trading below par, increasing par and future income. CLO structures provide strong creditor protections through collateral tests, industry concentration limits, and cash-flow diversion triggers. High yield now looks more like a double-B market, so it offers less upside than historically despite being perceived as a risk asset class. Static CLOs reduce reinvestment uncertainty and can create attractive equity IRRs by lowering fee drag and financing costs. First Brands was unusual because fraud, not normal business weakness, drove the problem; it should not be taken as representative of the asset class.

Data Points: AUM managed by Palmer Square: ~$37 billion - Size of the firm’s assets under management, especially in structured credit and CLOs. Average EBITDA of BDC borrowers: north of $400 million - Bloomfield said PSBD lends to very large borrowers on average. PSBD software exposure: about 11% - Direct software exposure in the BDC’s last reported quarter. Private credit software exposure: higher than syndicated market; likely well north of low teens - He said private credit is more exposed to software than broadly syndicated loans. Palmer Square exposure to third-party CLO managers: north of $4 billion - Structured products group exposure to CLO liabilities managed by other firms. PSBD non-accruals: sub 25 basis points - He cited very low non-accrual levels in the BDC. Fed rate cuts: 175 basis points - Bloomfield said base-rate reductions pressured BDC distributable cash flow. High yield quality mix: more double-B than in past cycles - He argued the high-yield market has become higher quality over time. CLO AAA spreads in January: around 115 bps - Indicative level before widening in early 2026 discussion context. CLO AAA spreads currently: around 125 bps - Approximate widening from January levels. Loan prepayment rate: about 20% per annum - Bloomfield said long-run loan prepayments are roughly this level. Static CLO equity IRR: about 17% average - Palmer Square’s average equity return across its static CLOs over the past decade. Number of static CLOs redeemed: more than 35 - He said the firm has called and returned capital on over 35 static CLOs. CLO deal size example: $500 million - Used in explaining how par building works. Typical CLO industry concentration limit: 15% for largest industry; 12% for next two largest - He used this as an example of structural diversification limits.

Pivotal Quotes: "our public BDC, PSBD, does own the majority of the underlying collateral in broadly syndicated loans" — Matthew Bloomfield: Explaining why PSBD differs from most public BDCs that focus on private credit. "we think investors should believe in that NAV, right? It's executable. It's real." — Matthew Bloomfield: Defending PSBD’s monthly NAV transparency and valuation credibility. "we pretty much pioneered the static CLO back in 2015" — Matthew Bloomfield: Describing Palmer Square’s innovation in CLO structuring.

Implications: Listeners should view public BDC discounts, CLO equity, and some software loan sell-offs as potentially overdone. The episode suggests transparency, size, and structure matter more than headlines, and that volatility may create opportunity rather than just risk.