Eagle Point and Investcorp are latest CLO firms to target SRTs

Sayed Kadiri

Editor

CLO investors and asset managers are increasingly warming to significant risk transfers (SRTs), with Eagle Point Credit Management and Investcorp Credit Management two recent examples.

There has been a pick-up in SRT issuance in the third quarter, with Creditflux reporting on European deals printed by Nordea, Standard Chartered and UniCredit, among others.

Global CLO manager Investcorp has emerged as an SRT investor, sources say. The impetus for the move came about when David Moffitt joined in 2020 as co-head of US credit.

Moffitt has a background in SRT investments through his time at LibreMax. Eagle Point, which is perhaps best known as a CLO equity investor (although this comprises about a third of its business), has moved into SRTs this year and underlined its commitment to this market by hiring Karan Chabba in July as head of ABS, MBS, SRT and specialty finance.

Eagle Point founder Thomas Majewski says SRTs have performed “exceptionally” and that it is rare for a deal to suffer a loss ratio of more than 1%. Eagle Point has endorsed long reinvestment periods in CLOs, but SRTs tend to be static, or have limited replenishment capabilities.

Chabba: hired in July as head of ABS, MBS, SRT and specialty finance at Eagle Point

Majewski says the lack of trading within an SRT is offset by an attractive payment profile and pricing. “The coupon on SRT equity looks appealing,” he says. “Although there is no concept of discounted buying in SRTs, deals tend to have double-digit coupons, plus you get the residual principal at the conclusion of a transaction.”

However, the timing of defaults is important, says Majewski. Those that take place later have less impact on returns. This is because the notional amount of an SRT’s portfolio is written down as defaults occur (and coupons are based on this figure).

As highlighted at Creditflux’s Credit Dimensions event in March, an advantage of SRTs over CLOs is that the underlying portfolios tend to be investment grade-rated, while reference instruments are in many cases revolvers.

Charles ‘CJ’ Martino, co-head of global institutional structuring at JP Morgan, said at the event that SRT equity investors can have an input in shaping a portfolio. He recalled one SRT in which the underlying credits were all CLO names, but given these were revolvers or term loan As, the SRT portfolio resembled a high-quality CLO.

Another advantage of SRTs is that as investment banks issue these transactions to improve their capital ratios, there is no need to complete a capital stack as you would in a primary CLO.

“You’re not going to be held up by a senior debt investor on pricing,” says Majewski.

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Global credit funds & CLO's

October 2022 | Issue 249

Published in London & New York.