This story is part of GlobalCapital's SF Vegas special report on the outlook for US securitization in 2026. It is available exclusively to subscribers until the conference takes place in February.
Matthew Layton is a partner at Pearl Diver Capital and heads up its EMEA business. The firm, founded in 2008, is a specialist investor in CLOs and significant risk transfer (SRT) transactions with offices in London, New York and Dubai. He spoke to GlobalCapital about the firm's recent incurion into the SRT market as well as its outlook for CLOs.
GlobalCapital: Pearl Diver is a long-time CLO investor, but in November you announced the first close of Pearl Diver Aquanaut Fund, which is dedicated to significant risk transfer (SRT) and capital relief transactions. What was the attraction of that move into SRTs alongside your presence in the CLO market?
Matthew Layton: SRT is a market that we've been looking at for a long time. We’ve sat very, very close to it for many years, because SRTs tend to be issued off the same desk as CLOs within the banks, so we're already in that information flow.
But the main component is our skill set, which is underwriting and pricing risk on portfolios of corporate credit. It is that corporate credit side of the SRT market that we're focused on. In that sense SRTs do not necessarily feel like a deviation from what we're already doing, just a slightly different format.
We appreciate that the SRT market, like every credit market, has experienced some tightening over the last 12 months, but we still think it makes sense on a risk versus reward basis. Maybe there is going to be a little bit of a price correction over the coming months, especially with the unexpected geopolitical shocks that continue to pop-up.
SRT seems like a clubbier market than CLOs which are a bit more widely syndicated in a lot of cases. In SRT, would you be looking more at syndicated opportunities, or club and bilateral deals?
We will have a diversified portfolio that will consist of some syndicated, some more slightly clubby transactions, and potentially some bilateral transactions as well.
Do you see a significant difference in the counterparties you're working with, comparing a bank SRT issuer to a CLO manager?
One of the nuances of the primary CLO market is that essentially, you're dealing with the investment bank to negotiate terms, pricing and everything else. If you're in the CLO equity market, you might have some influence over the underlying portfolio, but again, that is negotiated through the investment bank.
It's not too dissimilar to how negotiations take place in the SRT market. Most if not all of the counterparties that we are engaged with we already know because they're active in the syndicated loan market and the CLO market.
There's some crossover between the underlying CLO portfolios and the SRT reference portfolios as well, so we're familiar with the names. It might be in a different tranche, but there's a lot of familiarity there, both with the counterparty and with the underlying [borrowers].
You mentioned earlier that SRT offers an attractive risk-return profile. Do you look at it against CLOs on a relative value basis?
As we touched on, the two asset classes share many characteristics however they are still different asset classes, so when comparing the two you are not necessarily comparing like for like.
The SRT market offers something different to investors. Investors want to diversify. The early investors who have who have already committed to our SRT fund also invest in CLOs. These investors are seeing SRT as another way to access the corporate credit market and add diversification.
That's a good point to lead us into talking more about the CLO market. What is your spread outlook for the US CLO market this year across the capital structure?
There are going to be many twists and turns. Every year has many twists and turns, and there have already been a couple this year, so I don't think it makes sense to say now, ‘look, I think triple-A levels at the end of the year are going to be this or that’.
Geopolitical risk is obviously shaking things up again. What we saw last year was a tendency for the headlines to dampen down and then markets to rally back very quickly. That could happen again, but market participants shouldn’t be overly confident or think that is the base case. We all need to be very cautious, because there is certainly a risk of some elongated fallout from [the geopolitical developments] we're seeing.
Already this year we've had some positive news from the SEC regarding banks’ ability to hold CLO paper in loan format. We've also had positive news around European insurers' ability to allocate to CLOs. These are positive developments.
It is key to remain nimble. We trade in these markets daily. Don't pre-commit, don't get caught offside, don't make a huge directional call and get caught on the wrong side. That's one of the key things I think allocators and asset managers should be thinking about.
What do you expect when it comes to issuance?
In terms of issuance, we see a very healthy pipeline. There are a large number of warehouses that are already open. There is a lot of affiliate manager equity sitting behind those warehouses supporting the issuance pipeline.
If spreads do widen out a little bit over the coming weeks and months, then I think there will still be a healthy volume of prints that still come through. The pace might back off a little bit versus if things were still tightening but that should be the case.
A handful of borrowers have gotten themselves into trouble in various idiosyncratic situations recently. Do you think the CLO market should worry about defaults or other credit situations like liability management exercises (LMEs)?
CLOs invest in sub-investment grade loans, so some defaults are always going to come through. There's no headline there, and there really shouldn't be. Even if you take LMEs into consideration, loan defaults were down in the US in 2025 versus where they were in 2024.
LMEs have certainly been in the US market for a while now and it feels like they're here to stay. This is a market development that managers and investors will need to continue to monitor closely.
You have to factor that into your underlying loan default vectors. You run that through the CLO cash flows and make sure that you're being compensated accordingly for the risk. That's the skill of investing in CLO tranches.
LMEs have made managers become more cautious in terms of their portfolio management style. That's not necessarily a bad thing, to be thoughtful about where they're allocating to risk, certainly across individual names but sectors as well given the risk of further tariffs and supply chain disruption.
But one of the doors that has closed a little bit for managers is the option to invest in discounted loans, loans that might have underperformed and even been downgraded.Managers are less likely today to look at the business plan and buy into the turnaround.
Managers used to be able to buy into that turnaround story, pick up discounted loans, and build par off the back of it. That's just become a little bit more challenging these days, because if a loan starts to trade down into the low 90s or high 80s, then managers need to be cautious about what could happen at the sponsor level in relation to an LME.
How do you think competition between the broadly syndicated loan (BSL) market and private credit will affect the CLO market in 2026?
This story ebbs and flows. It was probably at its peak during 2024 when it felt that a lot of credits that might have gone to or even stayed in the BSL space flipped over into private credit.
But many were failed refinancings which the syndicated loan market couldn't get behind, and the issuers were able to find quick, convenient single name lender solutions in the private credit market. In 2025, we've seen some healthier profiles of credit where there's been a choice between the two markets, but ultimately, I think the two will continue to exist side by side.
In 2026, we are expecting to see a significant pickup in terms of the M&A pipeline and LBO pipeline slated for 2026, and so I expect a healthy volume of paper to come through as we get further into Q1. That will be supportive for CLO issuance. More loan supply will also be supportive for loan spreads as well, which should help equity arbitrage.
US BSL CLO new issuance
Source: KopenTech