The process of identifying these opportunities begins with SANTA’s delivery. SANTA is a proprietary tool that RPIA developed back in 2019; an acronym for Structuring, Analysis and Trading Assistant. SANTA pulls dealer pricing from around the globe and plots individual curves for a company as well as sector curves. It can identify when a bond issuance is mispriced against the company curve or sector curve. Given the sheer number of securities on the market, this quantitative tool is an essential first step.
Once SANTA makes its delivery and points out these mispriced opportunities, managers take over. Sometimes, Lagopoulos notes, a bond might trade cheap or rich on the curve because it’s a highly illiquid issuance. It could only be around $100 million in deal size, when real liquid opportunities come in individual bond deals that are over a billion dollars in size. Human managers can apply criteria like liquidity as well as the work of fundamental analysis to narrow the field of opportunities further and look for areas of value that they’re constructive on or areas they think are overpriced and can be shorted.
While the scale of the market sits at the core of these pricing opportunities, there are also current conditions that create new areas of possible upside. Lagopoulos notes that when volatility in the market picks up overall, mispricing often occurs because corporate credit is an “over the counter marketplace.” The recent rise in overall market volatility driven by US trade policy has created more mispriced opportunities for Lagopoulos and his team to identify.
Moreover, he notes that the overall quantity of corporate debt has grown significantly in recent years. In the US marketplace last year, he notes, roughly $1.4 trillion in new corporate debt was issued. That volume of debt compounds the impact of volatility on pricing, creating new opportunities to take advantage of a price dislocation.
Taking advantage of these opportunities, Lagopoulos argues, requires tools like SANTA and dedicated teams to follow up with the fundamental analysis. It requires the access to markets that institutions and specialized active managers can gain while many retail investors and advisors may lack the volume to execute effectively. It also helps to have a sophisticated and dedicated approach, in his view.