We’re investing for cashflow and capital gain with amortizing structured credit assets. Our strategy focuses on unique credit opportunities across the credit curve in structured credit assets and related trading strategies often ignored due to structural complexity and therefore trade at a discount to fair value. We target seasoned, fixed and floating rate assets offering robust amortization profiles, attractive current yields, and potential price upside with private label residential and commercial mortgage backed securities, asset backed including student loans, credit cards, auto, aircraft, equipment, home equity loans, and other collateralized debt
Our proprietary strategy compensates investors with more sources of return, downside protection from broad credit market movements, favorable tax treatment with long term gain objectives, and securitization-specific tools unique to structured credit assets as they adjust and evolve to their own ongoing exposure to loss. Structured Credit allows us to diversify and manage risks that impair liquidity and affect portfolio pricing. Traditional core credit strategies can only achieve this through the use of derivatives, with less transparency, limited liquidity in downturns, and more premium.
Given the exposure Core Credit investors have to tightening credit spreads, interest rates, spread duration and an ETF market that’s yet to be tested, Structured Credit allows investors to build portfolios with assets that respond favorably to higher interest rates and credit market downturns, improving liquidity with amortization and less price volatility, allowing reinvestment in similar risk at lower prices.
As credit markets deteriorate more attractive investment opportunities emerge, liquidity and dealer balance sheet become scarce. Amortization as a source of liquidity to fund reinvestment is always preferable as this occurs at 100% of face value.
Our strategy remains sustainable as long as a senior bond is amortizing. As amortization occurs in senior tranches, credit enhancement from subordination increases as a percentage of deal balance further affecting subordinate certificate ratings, price of the bond, spread, and duration. Excess interest as amortization slows, a feature unique to structured credit securitizations, ensures lower rated ABS tranches reliably move up the credit stack and tighten during both expansive and deteriorating credit cycles, while core credit valuations struggle in response to interest rate stimulus, credit spreads and spread duration.
Exceptional performance of the underlying collateral is not a defined or necessary amortization or appreciation catalyst as collateral quality tests and triggers, target credit enhancement and overcollateralization levels influence the cash flow waterfall of structured credit securitizations, therefore price. See “ABS Ratings History”. This graphic demonstrates how a deeply subordinate bond from a Subprime ABS deal with 25% in losses, reliably moves up the credit stack as the senior bond amortizes, affecting subordinate certificate ratings, price of the bond, spread, while shortening duration
Our competitive advantage in the market begins with the experience of our portfolio management team. Mr. Thompson has worked as an analyst, trader, and as an investor, successfully investing his own capital in this asset class in both senior and subordinate certificates. We have used this strategy to capitalize our business since 2010. Understanding what controls cashflows in distressed, subordinate certificates is more complex than investing in the senior part of the credit stack, however ensures we have a firm handle on what controls amortization in structured credit securitizations and how each certificate responds differently to credit, economic, systematic or legislative stimuli. This experience also affords us results-driven expertise and familiarity when it’s time to step in to longer duration assets
We believe the most compelling driver for the portfolio manager in the structured credit space is unique to their experience and convictions. When market participants are tethered to the same model, they tend to create similar results. There is no available alpha associated with the process. To create different results, you must rely on your own experience, knowledge and conviction. As an investor you leave available alpha on the table for someone else who’s experience sees beyond what’s measurable. Having invested billions of dollars successfully for institutional investors over the last two decades we have ideas as to how they think, and don’t think. We don’t buy equities, where everyone has to be on your side of the trade to make money. If you understand what controls the cash flows there are times you want to be the only bid. We understand the priority of payments and allocation of losses, and what drives amortization giving us a glimpse into how securitizations adjust and evolve to their own ongoing exposure to loss and therefore price/spread behavior/potential.
We believe our strategy compensates investors by diversifying risk and sourcing alpha, however limited to managers who are unconstrained by the black box model. We believe that institutional investors who understand the benefits of structured credit assets versus core credit, and the limitations inherent with the black box model expect more than market beta less a fee. As investors, if we were reliant on the black-box model we would have missed out on some of our best investment opportunities in the last decade.
Unlike core credit, our performance doesn’t hinge on market efficiencies or inefficiencies. Market inefficiencies enhance our ability to generate alpha, however unnecessary for our strategy to offer more sources of return and securitization-specific tools to diversify risk without the use of derivatives.
Our experience and proprietary analytics allow us to create our own assumptions, modeling variables and credit loss scenarios, affording us greater resolution than the black box model provides and assures we don’t overpay for credit enhancement simply because we can ascribe a value to it. If you don’t really know how much credit enhancement you need to get your money back and your target ROI, potentially you buy too much or overpay, as do many market participants.
Unlike their RMBS brethren, ABS securitizations build natural credit enhancement very quickly, tolerating egregious stress scenarios without tranche loss, or losses finding their way to the capital structure due to credit enhancement from a number of sources; over-collateralization, subordination, and accumulating excess collateral interest. Opportunities to own bonds that build credit enhancement so reliably and quickly don’t exist in Agency or private label RMBS/ABS.
Our current strategy embraces and exploits the over-the-counter/negotiated component of the structured credit market while focused on high-grade, liquid assets, defined cashflows, appreciation catalysts, and robust amortizations. We believe that acquiring specific, shorter duration assets with complimentary collateral quality tests/trigger status should allow us to diversify risk with securities that respond favorably to higher interest rates and any deterioration in credit, accelerating amortization, improving cash flows and enhancing liquidity. We believe that owning amortizing structured credit assets offering a spectrum of defined forecastable cashflows, often paying principal and interest monthly, should offer investors enhanced returns that benefit from compounding with minimal price volatility
Prior to establishing Cullen Asher (USA) LLC, Mr. Thompson spent the previous decade working for Deutsche Bank (2000) and Cantor Fitzgerald (2006) in ABS Trading / Credit Products Group. Our firm has been active in the Debt Capital Markets since January, 2010 with trading, support, and analysts in Dallas, and a trading desk in New York City managed by Michael J. Penrose. (Mr. Penrose previously managed 1BB+ at Credit Suisse Proprietary Structured Credit Trading). Michael has been with Cullen Asher since January, 2014.
From Cullen Asher Credit Opportunities, LP Capital Deck
“Structured credit is known for generating additional returns through accessing illiquidity, complexity and thematic market drivers derived from manager skill where active management is rewarded. We believe that our experience should result in a very real opportunity for investors to seize available alpha within the structured credit market”
“We believe that Structured Credit/Alternative Credit benefits fixed income/core credit as well as alternative asset investors eliminating the need to overlap managers that provide market beta less a fee, and that Structured Credit offers more sources of return verses similar core credit risk as well as downside protection from broad credit market movements”
“Using Structured Credit, we address what we see as a significant problem for the Fixed Income/Core Credit Investor; liquidity and price volatility as markets reprice. As fixed-income markets deteriorate, your portfolio should be the source of liquidity to reinvest in similar assets at lower prices”
“Without a manager who’s strategy successfully diversifies risk by return driver provided by alternative/structured credit, investors in traditional credit are exposed”
“We believe that portfolios that incorporate structured credit are better protected from broad credit-market movements. Well-structured portfolios constructed with an alpha-generative security selection process are based on how each certificate in the capital structure responds differently to the same credit, economic, systematic, legislative and structural stimuli”
Please review our Fund Offering Documents, Capital Deck and Prospectus for fund structure, strategy, and executive summary to determine if investment, legal, and compliance framework complement your allocation objectives.