opportunistic credit - sacrs.org spring conference/spring... · opportunities exist in the credit...
TRANSCRIPT
Opportunistic Credit
May 11, 2016
Presented by: Francois Otieno Director of Fixed Income Segal Rogerscasey
Table of Contents
• Section I: The Opportunistic Credit Opportunity Set • Section II: Description of each Credit Opportunity • Section III: Market Factors Driving Opportunities within Credit • Section IV: Implementation Considerations
2
The Opportunistic Credit Universe
Corporate Debt • High Yield • Bank Loans/Leverage Loans • Private Debt • Direct Lending • NPLs and RPLs • Distressed
Securitized and Mortgage Debt
4
These bonds are typically rated below investment grade
In the event these bonds are not rated by
the rating agencies, they would still exhibit the characteristics of below investment grade companies
Securitized bonds are backed by a pool of assets while mortgage debt is simply the underlying debt of private commercial and residential properties
Managers are primarily looking for
opportunities in the junior tranches (below investment grade) of the securitized segment of the market
• Agency MBS • Non-Agency MBS • ABS • CMBS • Collateralized Loan Obligations (CLOs) • Commercial and Residential Mortgage Debt
Public (or Liquid) Debt
Private (or Illiquid) Debt • High Yield • Bank Loans/Leverage Loans • Distressed • Agency MBS • Non-Agency MBS • ABS, CMBS • CLOs
• Private Debt • Direct Lending • NPLs and RPLs • Commercial and Residential Mortgage Debt
The majority of these securities are publicly traded with low bid-ask spreads.
Very diverse buyer base
These are privately negotiated deals with unique and bespoke terms
Very thin secondary market for some of
these deals and non-existent for others
The Opportunistic Credit Universe (Cont’d)
5
• High Yield • Bank Loans • Agency MBS
• Distressed • CLOs (Junior debt and
Equity) • NPLs • Commercial & Residential
Mortgage Debt
• Private Debt • Direct Lending • Non-Agency MBS • ABS • CMBS
Risk/Return Continuum Highest Lowest
6
Opportunities exist in the credit market across the risk/return spectrum, depending on a client’s appetite for risk and liquidity
The Opportunistic Credit Universe (Cont’d)
Section III Market Factors Driving Opportunities within Credit
Market Factors Driving Opportunities within Credit
10
High Yield
Source: Credit Suisse
Source: Credit Suisse
Source: BoFA Merrill Lynch High Yield Master II Index
11
Source: Credit Suisse
Defaulted Debt by Sector
Defaulted Debt by Original Issue Rating
High Yield (Cont’d)
12
Annual High Yield Default Rates
Annual Bank Loan Default Rates
High Yield default rates are the highest since 2009, but largely concentrated in the Energy/Commodity related sectors as well as in the metals/mining, representing over 80% of total defaults
Bank Loan default rates have remained relatively low, largely due to the fact that bank loan indices has very little exposure to Energy/Commodity related sectors
High Yield vs Bank Loans: Default Rate Comparison
Source: Credit Suisse 14
Recovery rates for bonds in 2015 was 37 cents on the dollar, while recovery rates for Loans was 58 cents on the dollar
Today 15.3% of the high yield market is considered distressed, the highest level since the 2008 financial crisis
Distressed Debt
15
Heavy concentration to the Energy and Commodities sectors in the high yield index
Distressed Debt (Cont’d)
16
The Technology sector as a percentage of the CCC bucket has doubled in size in the last few years
Leverage ratios have also
increased over the same time period
Distressed Debt (Cont’d)
17
European banks (depicted by the yellow bars) hold significantly larger portfolios of NPLs than their U.S. counterparts
Non Performing Loans (NPLs)
18
Process of Securitization
This exhibit is a generic representation of the mechanics of securitization
Opportunistic Credit managers generally identify the BB/Ba (or below) rating category as the “sweet spot”
19
Legacy Non-Agency MBS represent the opportunity set. There has been virtually NO issuance since 2008 93% of the market is rated below investment grade, including over 80% rated CCC or below
Non-Agency MBS
Source: PIMCO, JPMorgan, Deutsche Bank, Bank of America/Merrill Lynch
20
Collateralized Loan Obligations (CLOs)
CLOs 2.0 represent the new wave of opportunities within the CLO market
Junior debt and Equity
tranches offer some of the most attractive risk/adjusted returns
21
No one single product or strategy will capture the full breadth of the Credit opportunity set Each manager has a bias towards certain segments of the credit market. In fact, some strictly specialize in one area and others
employ a multi-strategy approach Even within each sector or sub-sector, opportunities vastly differ by manager
Implementation Considerations
23
Manager B
Manager E
Manager A
Manager C
Manager I Manager D
Manager H
Manager K
Manager G
Manager J
Manager F
Liquidity Continuum of Manager “Fund Structures” Least Liquid Most Liquid
Implementation Considerations (Cont’d)
24
“Daily” “Monthly” “Quarterly” “Semi-Annual or Longer”
Specialized Approach Pros: Primary focus and expertize of the firm and critically
important to its overall business Competitive advantage in sourcing deals Greater likelihood of generating stronger returns for this
specific sleeve
Cons: This narrowly focused area of the credit opportunity set
may be out of the favor at a particular time during the economic and market cycle, hence, hindering performance
With a specialized manager program, a client will pay
incentive fees to the best performer(s) in spite of the fact that other specialist managers within the program may have performed poorly
Multi-Strategy Approach Pros: Ability to make quick tactical adjustments to portfolio
structure in order to take advantage of market opportunities as they present themselves
Incentive fees are paid at the aggregate portfolio level Better suited for smaller clients or clients that do not
have the internal resources to conduct due diligence on a large number of managers
Cons: It is very difficult to identify managers with strong
expertize across the full credit spectrum Risk of strategy teams defecting
Implementation Considerations (Cont’d)
25
Implementation Considerations (Cont’d)
The majority of Opportunistic Credit strategies are managed in a closed end vehicle and some managers offer multiple vehicles
Terms do vary widely across managers The underlying vehicles and fee structures will generally dictate where the investment resides within a
broader asset allocation framework 26