9Questions is our Q&A series featuring key decision-makers in the corporate credit markets — get in touch if you know who we should be talking to!

Deepak Natarajan is managing director and co-head of King Street Europe, and co-portfolio manager of Rockford Tower Capital Management Europe. He has been at King Street since 2009, and managing CLOs in all seasons.

So while things have been stormy lately in CLOs, Natarajan has some rain gear at the ready.

2025 has seen loan and CLO issuance quiet down, amid general uncertainty over the impact of trade wars and a global geopolitical shift away from the US. However, Natarajan believes some issuers may have been too heavily discounted in the general market selloffs we saw earlier this month — presenting a valuable opportunity to build par.

Globally, Rockford Tower has $11.15bn in AUM across 27 CLOs as of the end of March, according to 9fin‘s Q1 2025 CLO manager AUM rankings. That includes $7.58bn in 19 US BSL CLOs, and $3.31bn across eight European CLOs.

We caught up with Natarajan to hear his thoughts on managing CLOs in the face of tariff turbulence, finding the right opportunities among discounted loans, engaging CLO investors in a tough pricing environment, the outlook for European credit, and more.

1. The global tariff picture has evolved rapidly since Liberation Day on 2 April, with many sectors featuring prominently in much of the changing headlines and potential negotiations. Given how much is in flux with tariffs, how are you approaching credit selection?

One thing we focus on at King Street is downside protection in every credit that we’re involved in. That means constantly asking the question “What could go wrong?” We can't control the daily headlines. What we can do is focus our capital allocation on businesses we think are sustainable through different cycles, that have appropriate capital structures and can withstand certain shocks.

We experienced a similar thing during the inflation shock in 2022, where we expected some margin contraction across our portfolio, which we saw in certain credits. But ultimately, if you're in the right credits with some pricing power, you should be okay.

As active traders, we've come across compelling opportunities when the market overshoots. Particularly in the first week of April 2025, some loan prices were down multiple points in credits that we know very well – that are very defensive, that shouldn't have a lot of exposure to whatever the tariff regime ends up being. We're always looking for ‘baby with the bathwater’ type situations. We're remaining calm, because appreciating the fluidity of the situation is very important.

2. Spreads have widened out quickly in recent weeks, and CLO issuance globally has slowed. How are managers getting to the finish line with deals that are in progress?

We've seen several deals get pulled from the market. Clearly, it's been challenging for the underwriting banks to keep books together at previous price talk or indications. And bankers, managers, and equity investors have had to have very honest conversations about what the best potential path is going forward, whether it's forging ahead or putting a deal on ice.

I think if the triple-A's are covered at a reasonable level, given that's 60% of your capital structure, even if the double-A's and mezz are wider, it still might make sense to print the deal. Equity investors know that the day one arb is not necessarily the only indicator to look at. If you're invested in a decent manager over time, they can add a lot of value. Maybe you've been able to source underlying assets at better than previously modeled levels, so that can work too on the asset side. But these are the types of decisions that have to be made carefully, quickly, in real time.

3. How can managers stand out when pitching triple-A investors, even with so much uncertainty? And when secondaries offer more attractive value at the moment?

The secondary market is something that you always have to compete with. Triple-A investors tend to gravitate towards size and scale. They generally want to know there's a commitment to the business, and liquidity in that particular manager's shelf. Demonstrating that you're a regular issuer, with a predictable deal cadence, in addition to having an equity solution and good performance, is pretty important. In general, for us, one of the things we're most focused on is par build across all our deals. We believe it's one of the few things that a manager can do to benefit both the debt and the equity. So if you have all those things lined up, then you can get your triple-As over the line.

4. There are many second-order effects of the recent US policies that can affect loans, even those not directly tariff-exposed. On the other hand, loans are finally cheaper. What other patterns, outside of tariffs, are you paying attention to now as you select credits?

We are entering a period where earnings will be challenged. The environment could be stagflationary, and ultimately could result in an economic recession. Regardless of the final outcome of tariffs, a lot of uncertainty for business tends to lead to a pullback in investment, delayed cap-ex decisions, which ultimately is bad for growth.

We are cautious on companies with limited revenue visibility, those tied to discretionary spend by the consumer. You mentioned some of the sectors - travel, leisure, retail, and some cyclicals, and generally right now we prefer names that are more insulated and where you have more business visibility. That list skews towards business services, telcos, healthcare, and infrastructure.

And on loans being cheaper, yes, for CLO warehouses that are lightly ramped, maybe there was an interesting opportunity to purchase high quality businesses at discounted dollar prices. That opportunity closed very quickly, but who's to say that that couldn’t come back. So you have to be deliberate around sizing and ramp timing, given the uncertainty of the liabilities, but also it's a good opportunity to trade assets within your warehouse where you see opportunities.

5. Given the sudden reversal in spreads and issuance this year, what is your outlook for the European CLO market for the rest of this year?

Obviously, Q1 was huge in terms of issuance, with spreads tighter materially. Weighted average cost of debt came down to levels not seen since the second half of 2021. Given the recent macro volatility, it's quite easy to say CLO new issuance will grind to a halt the next few months, but we never underestimate the ability for arranging banks and CLO managers to find a way to get deals done in challenging market environments.

And there are several positive technical factors at work. CLOs that are past their reinvestment periods are amortizing down, and debt investors seemingly have cash, whether it's new funds raised, or cash from core deals, or resets earlier this year where they didn't roll. And you have the Japanese banks' start of the fiscal year, which could see triple-A demand come back. So I think 2024 was a record year, but if you think back to 2022 and 2023, which were both very challenging macro environments with uncertainties around inflation and the US regional bank crisis, issuance was still pretty decent in those years so I suspect we end up somewhere between the two.

6. The recent fiscal expansion in Germany was another big event this year. What implications do you think that has for the European CLO and credit markets?

In isolation, it is a major shift from German economic policy’s historically very tight budgets and fiscal prudence, to meaningful long-term investment in infrastructure, defense, and energy. Whilst most of the stimulus will drip feed in from 2026 onwards, the signal alone will likely, leaving aside tariffs, lift consumer confidence, business confidence, and revive some sort of animal spirits in Europe, which we just haven't had.

In the loan space, maybe it sets the stage, or in credit, for renewed M&A, renewed issuance, particularly in the sectors that are likely to benefit the most, whether it's infrastructure, construction, industrials, defense, and energy. It's one of the main reasons you've seen European risk assets outperform the US, across a number of different asset classes year to date.

I'll caveat that by saying the timing of all this remains uncertain. And a lot of near-term risks remain around the other things we've talked about, but in the medium term, it should be a huge positive for Europe.

7.  What does the appetite for third-party equity look like at this point, and how is the fundraising environment right now?

Earlier this year there was strong third-party equity demand, given where the weighted average cost of debt is, and a number of third-party investors were exercising their optionality in CLOs by resetting existing deals and extending the reinvestment periods. Right now, until you see some stability and the triple-As come in, and maybe that happens with the Japanese investors coming back, I think it will be quite limited.

On the flip side, loan prices have sold off, although not that much now. In the event you did see more weakness, there might be some investors that look to execute a print and sprint transaction, particularly managers that have captive equity. We saw in 2022 and 2023 that creating portfolios at discounts provides interesting optionality.

Credit is very in vogue with the allocator community. Whether it's long/short credit where there are huge opportunities driven by dispersion, or opportunistic credit as levered companies still require creative capital solutions to deal with liquidity and/or upcoming debt maturities, or distressed as we move into a slower growth and potentially recessionary environment. For all the asset classes within credit, we believe the fundraising environment is pretty good.

8. LME and default risks are expected to rise as the trade war effects are increasingly expected to produce a global recession. How are you pricing that into your portfolio and assessing that risk among your holdings?

Frankly it's something that we've been thinking about a lot in the past few years, not just the past few months. King Street has been probably one of the most active participants in LMEs, so we have a very good understanding of what the art of the possible is from all different angles.

We anticipate the pace of LMEs will likely continue, especially as we get into a more contractionary economic environment. As I mentioned, there are still lots of companies out there that are probably too levered and will require creative solutions as they address liquidity concerns or maturities.

It's important for us to identify LME risk early and be proactive on reducing loan issuers where we think there is both business deterioration and process risk. If you can't write a new money check, follow your money, or be on the steerco, you may not want to be in the trade. And conversely, where we have been part of a group, we believe it can hugely improve our outcomes in the form of additional economics and ultimately much higher recovery rates, and we've seen multiple examples of this.

The best way to protect yourself ultimately is to invest in companies that are sustainable through the cycles and are adequately capitalized, in which case, there's a much lower risk of an LME.

9. What’s one thing you regret not getting to yet this year, outside of work?

I would say getting my golf handicap down. That requires a lot of practice, which I haven't had the time for. It's an incredibly hard sport with lots of ups and downs, and requires a lot of patience, perseverance and learning from mistakes. So in a way, it's a lot like investing.

Check out our full collection of 9Questions interviews here.