Assets that used to look for a home in private credit or corporate bonds, have started to flow into securitised credit, according to Andrew Jackson, head of securitised credit at HSBC Asset Management.
Given how much money has chased uncorrelated returns in private credit and how frothy it may appear to some investors, Jackson believes it is driving demand for his asset class.
“We’re seeing a number of investors trying to dilute their private credit exposure,” he told FSA in an interview. “They want to hedge their bets a bit. Public markets is a good way to do that and securitised is the first stop.”
Securitised credit comprises a group of loans such as commercial mortgages, leveraged loans and credit card debt, which are restructured into tranches of different seniority and collateral quality that investors can choose between based on their risk preference.
Since the underlying assets are typically illiquid, but the bonds they are packaged into for investors are tradeable, their semi-liquid nature and higher yielding cash flows are starting to look appealing.
Due to tight corporate bond spreads and an uncertain macroeconomic environment, the extra spread in securitised is starting to look attractive to investors, according to Jackson.
“The situation where securitised credit performs really well is actually a mild recession,” he said. “The interest generated from the loan portfolio is bigger than the interest bill on the other side, so the first stop is the excess spread.”
“In a mild recession where you get a low level of defaults, securitisation works really well. And in a mild recession it is difficult for spreads to tighten, but the appeal of securitised is that it tends to pay more than fixed income, so elevated credit spreads are supportive.”
Institutional demand
Across Asia, Jackson said he has seen a “significant uptick” in demand for the asset class because of the attractive yields on offer.
In particular, institutions with regulated balance sheets, such as banks, insurance companies and pension funds, are looking more closely at the asset class.
Jackson said: “If you have a regulated balance sheet, there are different connotations in different localities. So we’re spending a lot of time working out the effect on the return on capital for those regulated balance sheets.”
“There’s a requirement to invest in liquid assets that have a competitive capital charge,” he explained.
“So, for instance, regulators are changing insurance regulations and securitisation regulations to line up and to make it more attractive for insurance companies in Europe to invest in this asset class.”
Recent reforms in the European Union have introduced lower capital charges for senior tranches of securitisations to improve its capital efficiency for insurers.
Jackson said: “It will have a higher return on capital and therefore more insurers in Europe and in Asia, and insurers already in the US, are looking to put money to work.”
He said the regulators are getting behind it because of what securitisation does for an economy, helping to move money from investors into the real economy.
“They’re looking at changing the regulations to promote that by giving institutions higher return on capital,” he explained.