RFPnetworks Alternative Credit research papers depicted by man at vending machine
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Alternative Credit for Alternative Investors

Alternative Credit
Fixed Income

Buy the company, the buildings or the debt?

RFPnetworks Alternative Credit research papers depicted by man at vending machine

It has not gone unnoticed by the some of smartest sales people we talk to, that both the buyers of businesses (Private Equity firms) and Buildings (Real Estate Investors) are now buying loans and CMBS respectively. The thinking goes like this:

Own the company and it's assets. Or own the senior secured financing of that company for a more certain double digit return, with low leverage, that is in line with fund targets.

For CMBS the story is similar, but potentially even more compelling. With interest rates still rising and property valuations falling in many major cities, yields on the mortgages behind these buildings are higher today. A phenomena that may remain for as long as rent and property valuations face continued downward pressures.

Aegon Asset Management
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RFPnetworks CLO Equity Manager Research depicted by a waterfall

Why Invest in CLO Equity Before A Recession?

CLO Equity is often is often perceived as a bull market product. When the world is awash with liquidity, the ability of corporates to refinance their loans is easier and the subsequent cashflows can cascade down the waterfall to the CLO equity holders. But if your base case is a recession - tighter credit markets - why would you invest in CLO equity?

There are many reasons to consider CLO Equity ahead of a recession. In fact, those that did before the global financial crisis and the COVID pandemic earned approximately 400 basis points excess return above the long term average across CLO Equity vintages going back to 2002.

The trick is to find active CLO managers that can re-invest cashflows into higher yielding loans as prices fall, with strong covenants and limited default risk. Sounds simple, but it is not. It's about finding right active CLO manager, especially ahead of a recession. Investment Manager selectors that do the research, will work out who these managers are. And that is what they are doing inside RFPnetworks.

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RFPnetworks Real Asset Debt research depicted by power cable pylon.

What To Expect from Real Asset Debt?

One of the attractions of Real Estate and Infrastructure Debt is the illiquidity premium that can be earned. But how does that basis point boost perform in a down turn?

Whilst private debt has gained popularity with institutional investors as an alternative to bonds in a rising rate environment, many are new to the asset class. With traditional bond markets struggling year to date, investors are now researching the ability of illiquid assets to outperform in a recession. And critically, which specific market segments will maximise the premium differential as and when public markets rebound.

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ABS Research for Cash Portfolios on RFPnetworks depicted by dark empty parking lot with man walking

The Role of ABS in a Cash Portfolio

How do Senior AAA European ABS impact the liquidity, safety, and yield of a cash portfolio over a 6-12 month horizon?

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Are European Loans More Attractive than US Loans?

At the end of May, US Retail investors came back to the US leveraged loan market following three previous weeks of net outflows. And whilst this is not necessarily a buy signal to other investors, it marked the climb to a spike last week in Loan research activity in our feeds, by European Institutional Investors. But their interest was not US leveraged loans. It was European leveraged loans.

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CLO Loans Research on RFPnetworks depicted by plane flying above two skyscrapers

Should You Invest in European or U.S. Loans?

The long-term risk-adjusted relative performance of European Loans versus U.S. loans, U.S. and European high yield bonds, has got institutions interested.

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ABS Asset Backed Securities Research on RFPnetworks depicted by mercedes cars for sale with loan financing

Consumer-Focused ABS On The Radar

Given the widening in corporate credit-risk spreads since February, consumer-focused ABS is gaining the interest of professional investors.

Given a backdrop of strong labour markets, nominal wages, and solid household balance sheets, there is clearly support for consumer-related segments of the ABS market, such as auto loans.

The unknown risks are how inflation and rising rates will impact future absolute levels of delinquency.

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Euro US CLO research on RFPnetworks depicted by dog waiting on dry river bed

Are European Loans Less Attractive Than US Loans?

Whilst Loan Issuance for 1Q22 in both the US & Europe was strong, levels were less than 1Q21. But those stats don't tell the whole story.

In Mar 2022 in Europe, there was zero syndicated loan issuance.

The question now is where will loan investors turn?

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Securitised Credit research on RFPnetworks depicted by row of colourful wooden houses.

Agency Mortgage Backed Securities Regain Attention

Following a fall of 5% in 1Q22, Agency Mortgage Backed Securities posted a quarterly performance that was worse than the taper tantrum of 2013, and more that twice as bad the next worst quarters in 1987 and 1994.

Interestingly, Agency MBS spreads have trended higher higher as the risk of mortgage prepayment has actually trended lower.

Professional Investors are therefore asking whether agency MBS can earn them yields that are relatively attractive for the asset class on a historical basis, but also compared to alternatives within the high quality fixed income space.

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Alternative Credit research on RFPnetworks depicted by close-up of twins eyes

What Types of Alternative Credit are Getting the Most Interest?

Alternative Credit is taking centre stage in professional investors fixed income portfolios.

But what types of alternative credit are getting the most interest from professional investors? The opportunities are wide and varied, as are the risks.

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Loan CLO research on RFPnetworks depicted by old leather history book

Loan & CLO Returns 1Q22 Join The History Books

Since 2000, there have only been 14 negative quarterly returns for the CLO and Loans asset class. The impact of the Russia-Ukraine crisis on the loan markets, has resulted in 1Q22 being one of those quarters.

However, the negative quarter was one of the smallest compared to what happened during the Global Financial Crisis of 2007/8, the European Sovereign Debt Crisis of 2011, or the China Trade War of 2018.

The question now on investors minds, is what can they expect from loans and CLOs for the remainder of 2022.

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How To Handle Six 25 Basis Point Hikes In Rates in 2022

With markets expecting increasing central bank hawkishness, should Fixed Income investors turn to Bank Loans?

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