Eagle Point makes mark in SRT

Eagle Point Credit, based in Greenwich, Connecticut, is not, perhaps, a veteran of SRT investment but it’s also got more road under the tyres than some of the more recent, big name, arrivals in the market.

The firm, which describes itself as an investment manager focused on “niche, income-oriented credit strategies in inefficient markets”, was founded in 2012 and started investing in SRTs in earnest with the hiring of Karan Chabba a decade later. In the last two years, it has invested US$350-400m in synthetic reg cap securities with 12-15 different counterparties, says Chabba, principal and head of RCR/specialty finance – RCR standing for regulatory capital relief.

The initial focus - and one that remains the fulcrum of Eagle Point’s investment strategy - was the CLO market and in particular CLO equity tranches. However, about five years into its life, the firm began to diversify investment. The move to SRT was part of that expansion, and Chabba was hired from KLS Diversified Asset Management to bring accumulated expertise and market relationships.

His experience in structured products in general, coupled with the firm’s history in CLOs, has helped extend Eagle Point’s subsequent reach in the SRT market, so that it now is able to take positions in a range of structures and assets. “The CLO business has helped with disclosed pools and the ABS business helps with blind pools. Some people often do one and not the other,” says Chabba.

Though based in the US, Eagle Point has principally dealt with European and Canadian counterparts to date.

Deals from US issuers have tended to offer tighter spreads than in Europe for the same kind of collateral pools, which is part a reflection of US deals exhibiting thicker tranches and also comprising lower risk reference pools. Spreads on some recent US deals have been in the region of SOFR plus 400bp-450bp, which is around half where similar deals were done a year or so ago.

Spreads in European product have tightened as well, of course, but Chabba points out that this has occurred across asset classes. “What can investors turn to? Spreads have not tightened in a vacuum. Double B ABS used to get you plus 800bp and are now plus 400bp. Double B CLOs used to be plus 950bp-1000bp and are now plus 600bp. Everything has tightened,” he says.

Much was expected of the US market this year, and while issuance has been significantly greater than in the past it has not reached the heights that was hoped for. Does this mean that SRT investors have had to turn elsewhere?

Chabba doesn’t think so. Traditional SRT investors have fixed pools of capital they allocate to the space and so don’t really have room to go anywhere else. Of course, other asset managers can go to alternative forms of private debt transactions but he says he has not heard that happening a great deal either.

The decision by the Federal Reserve, announced in a speech by vice chair of supervision Michael Barr last week, to row back on the most excessive initial strictures of Basel III Endgame, raises the possibility that US issuance will not be as voluminous going forward as was once thought likely. Chabba says that a revision of the original B3E proposals was largely expected by the market and that issuance will likely still be significantly greater than in the past.

Eagle Point has also been on the other side of deals with Canadian banks, four of which last year joined pioneer Bank of Montreal in the market. The Canadian financial year ends on March 31, so the next two quarters should see renewed issuance from these counterparties.

Although Chabba brought a host of contacts to Eagle Point, and he stresses that it takes a long time to develop these relationships, the core CLO business brings new names to the table as well.

 “SRT is an attractive asset class. Issuance should continue to grow. It gives investors a chance to get into an asset class which we see as relatively low risk without excessive volatility in the underlying assets. And yet we see returns remaining relatively attractive as well,” he concludes.

Simon Boughey