“This is an easy playbook in structured finance: buy mortgages. The Fed came in and said we are going to do whatever it takes to make sure we can transmit affordable financing to the largest borrowing base which is the residential market.”
SkyBridge co-Chief Investment Officer and Senior Portfolio Manager Troy Gayeski was joined by three leaders in the structured credit space, Clayton DeGiacinto of Axonic Capital, TJ Durkin of Angelo Gordon and Chris Hentemann of 400 Capital to discuss the state of structured credit following the COVID-19 pandemic.
After structured credit markets suffered a severe market dislocation as a result of the pandemic and its lockdown, the guests offer their view on how this current financial crisis compares to the last one and how that informs their investments. “This is an easy playbook in structured finance: buy mortgages. The Fed came in and said we are going to do whatever it takes to make sure we can transmit affordable financing to the largest borrowing base which is the residential market.”
Also discussed are broader philosophies around investing in structured credit markets. “Our ethos in our firm is let’s invest in cash flow and make sure we get the cash flows back and generate an agreeable return”
LISTEN AND SUBSCRIBE
SPEAKERS
Clayton DeGiacinto
Founder & Managing Partner
Axonic Capital
Chris Hentemann
Managing Partner & Chief Investment Officer
400 Capital Management
TJ Durkin
Co-Head, Structured Credit
Angelo Gordon
EPISODE TRANSCRIPT
John Darsie (00:00:04):
Hi, everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of Salt, the global [inaudible 00:00:13] at the intersection of finance, technology, and geopolitics.
John Darsie (00:00:17):
SALT Talks are a series of digital interviews that we've been hosting in lieu of our in-person conference, the SALT conference which takes place annually in Las Vegas and we've done several international conferences as well in Abu Dhabi, Tokyo, and Singapore. What we try to do at our conferences and what we're trying to do here with these SALT Talks is provide our audience a window into the minds of subject matter experts, as well as provide a platform for big, important ideas and discussions on what we think are very compelling investment opportunities out there in the marketplace.
John Darsie (00:00:46):
Today we're very excited to host a talk about structured credit markets, which are near and dear to our heart. Structured credit markets suffered a severe dislocation in March as a result of the pandemic and the ensuing economic shutdown. But they've started to recover.
John Darsie (00:01:01):
For today's talk, we're welcoming on three experts in the structured credit space to talk with SkyBridge co-chief investment officer and senior portfolio manager Troy Gayeski. I want to provide a brief introduction to our three panelists.
John Darsie (00:01:15):
Which are Clayton DeGiacinto of Axonic Capital. TJ Durkin of Angelo Gordon. And Chris Hentemann of 400 Capital. I'll go through a bio for each panelist before I turn it over to Troy.
John Darsie (00:01:28):
Clay DeGiacinto is the founder and managing partner of Axonic Capital, an investment management firm focused on structured credit and systematic fixed income opportunities. He serves as the chief investment officer for the firm's investment funds and commercial lending business.
John Darsie (00:01:43):
Prior to founding Axonic in 2010, Clay was responsible for building out the mortgage investment platform at Tower Research Capital and was the senior portfolio manager for Split Level, LLC, which is the predecessor fund to the Axonic credit opportunities fund.
John Darsie (00:01:59):
From 2002-2008, Clay was a vice president in a fixed income, currency, and commodities group at Goldman Sachs. Previously Clay served as an Army Ranger and a captain in the US Army, in the 25th infantry division from 1995-2000.
John Darsie (00:02:16):
He joined the Army after attending West Point, he's a graduate of West Point. He also holds an MBA from the Wharton School of Business at the University of Pennsylvania. He's on the board of directors for Team Rubicon, a great charity that we featured at the SALT conference before. We'd like to thank Clay for his service and for his ongoing philanthropy work supporting veterans and their families.
John Darsie (00:02:36):
TJ Durkin is the co-head of structured credit and the head of residential and consumer debt at Angelo Gordon, a privately held alternative investment firm founded in 1988, that manages approximately $35 billion across a broad range of credit and real estate strategies.
John Darsie (00:02:53):
TJ joined Angelo Gordon in 2008 and is a member of the firm's executive committee, as well as the co-head of the firm's structured credit platform. He's the co portfolio manager of the firm's residential mortgage and consumer debt securities portfolios, the CIO of Mitt, M-I-T-T, and Angelo Gordon, which is Angelo Gordon's publicly traded mortgagery. He serves as a board member of Arc Home, Angelo Gordon's affiliated mortgage originator, and GSE licensed servicer.
John Darsie (00:03:23):
TJ began his career at Bear Sterns where he was a managing director on the nonagency trading desk. He earned his bachelor's degree from Fordham University and currently serves as a member of the school's president council.
John Darsie (00:03:35):
He's also a board member of VE International, a not for profit focused on preparing high school students for college and careers through skills learned in an entrepreneurship based curriculum.
John Darsie (00:03:46):
Finally our third panelist today is Chris Hentemann, who is the founder, managing partner, and chief investment officer of 400 Capital, which is a structured credit asset management firm offering qualified investors access to a broad range of investment solutions across the structured credit space.
John Darsie (00:04:03):
Chris founded 400 Capital in October of 2008 and heads the firm investment and operating committees. Prior to 400 Capital, Chris was the head of global structured products at Bank of America Securities. Before that he spent time trading and investing in structured credit markets at Solomon Brothers and Credit Suisse First Boston.
John Darsie (00:04:23):
Chris is a graduate of the Carroll School of Management at Boston College, with a bachelor of science degree in finance.
John Darsie (00:04:31):
Hosting today's SALT Talk, as I mentioned, is Troy Gayeski, who is a partner, senior portfolio manager, and co-chief investment officer at SkyBridge Capital. Which is a global alternative investment firm that's focused on multi manager hedge fund solutions. Troy is a graduate of MIT.
John Darsie (00:04:49):
Just a reminder to everyone. If you have any questions for any of the panelists during today's talk, you can type them in the Q&A box at the bottom of your video screen. And with that, I want to turn it over to Troy Gayeski, who's going to conduct the interview.
Troy Gayeski (00:05:01):
Yeah. Thanks so much, John. And thanks, everybody, for joining us today. Before we get into the meat and potatoes of structured credit markets, we wanted to give each of the panelists a chance to talk a little bit about their background and their firm in more depth.
Troy Gayeski (00:05:14):
Particularly on the human side, how they made the journey for they grew up to where they are today. Clay, if you don't mind leading off in that we'd love to hear that story.
Clay DeGiacinto (00:05:25):
Sure, Troy. Thanks for having me today. I guess I have a little bit of an irregular background. I graduated West Point, I came from the Midwest, southern Illinois. And post my mechanical engineering degree from West Point, I served as a military officer in the United States Army, as a field artillery officer stationed out in Hawaii.
Clay DeGiacinto (00:05:47):
That was in the late '90s, it was a different Army back then. It was certainly pre-9/11. I'd always wanted to go to Wall Street and try my risk appetite through trading financial instruments, and I thought the perfect conduit to that was through business school. So I went to Wharton. I started on a mortgage trading desk at Goldman Sachs back in 2002.
Clay DeGiacinto (00:06:12):
They gave associates fresh out of business school a fairly low risk job to perform, which at that point in time in the mortgage department was the adjustable rate mortgage desk. Because it was relatively low duration. It was hard to lose a significant amount of money in relatively low duration assets.
Clay DeGiacinto (00:06:33):
But as luck would have it, the curve steepened out quite a bit in 2003 and that was really the advent of all the affordability products. Adjustable rate mortgages, 31s, 51s, 71s, 101s, even the negatively amortizing mortgages that we can all sort of chuckle about today was quite heady back in the early to mid 2000s time environment.
Clay DeGiacinto (00:06:58):
But managed to position anywhere between two almost $10 billion of both loans and securities, all parts of the capital structure including cash and synthetics. And both on the agency as well as nonagency side of the business.
Clay DeGiacinto (00:07:16):
Most people that remember the last global financial crisis that were in the mortgage business know that it happened really in 2007, not 2008. So post-2007 I thought what a great time to become an entrepreneur and take advantage of some of the dislocation during the last financial crisis.
Clay DeGiacinto (00:07:36):
That's when I went out on my own. Left Goldman and started my business. As it was introduced, I started at a firm called Tower Research Capital and launched Split Level, LLC. Which frankly is the predecessor fund to what we're running today.
Clay DeGiacinto (00:07:54):
Firm is about 55 people. We're based in midtown Manhattan. We invest in all parts of structured credit. RNBS, CNBS, CLOs, multitude of asset backed securities. Even some equities if they're balance sheet heavy, like [Reets 00:08:13] or BDCs. We manage a little over $3 billion in assets through public and private vehicles.
Troy Gayeski (00:08:23):
Great, Clay. That's a great summary of your background. Are there any skills in particular in the military you learned that you think are applicable today to you as you're managing Axonic? Particularly in times of stress.
Clay DeGiacinto (00:08:35):
Well listen. I think these businesses, risk management is probably the number one function that everybody on this panel thinks is their highest priority. That's also critical in the military as well.
Clay DeGiacinto (00:08:52):
I think that a lot of my friends and former classmates from West Point served careers. And frankly, a lot of them are still in. They've succeeded going up the ranks in the military. Some today are even a general or even very senior colonel. They've been great risk managers throughout their career, including in operating in combat.
Clay DeGiacinto (00:09:19):
I never had that opportunity. I left the military before 9/11, before we'd been engaged in years worth of wars. But I do think risk management is a skill that can transfer across from the military to finance. That's really thinking about and receiving and considering imperfect information in everything that we invest, and trying to make mission critical decisions around that. Which is exactly what happens in the military.
Clay DeGiacinto (00:09:50):
But more importantly, if you're wrong or if there's some bit of information that comes that makes you want to change your mind, you can act on that decisively and accordingly.
Troy Gayeski (00:10:01):
Got you, got you. Thanks for that summary, Clay. Really appreciate it. Chris, do you want to give us a little background? A little info on your background, as well as the firm?
Chris Hentemann (00:10:11):
Yeah. You're going to get a lot of similar crossover themes to Clay, so I'll try to keep it somewhat brief because Clay hit on a number of things that probably will carry over for all of us.
Chris Hentemann (00:10:22):
But to make it a little personal, I did actually almost 30 years to the day, I started in the business. I got out of school in May of 1990 and I started what was First Boston Credit Suisse in June of 1990. For better or for worse, I think it's for better, this is pretty much all I've been doing.
Chris Hentemann (00:10:42):
I landed on the mortgage trading desk at First Boston in the early '90s, a very interesting time because it was really the front end of a lot of mortgage securitization. Particularly I was working on a desk that was focused on derivatives. So it gave me really interesting introduction to the mortgage and securitized product universe.
Chris Hentemann (00:11:04):
I spent four years there. And then got an offer to go to Solomon Brothers, which was a really exciting place to work. Particularly to be in the bond trading business at Solomon Brothers in mid '90s. So I traded for a few years at Solomon Brothers and then left to go to what was Nations Bank in the mid '90s with one of my colleagues.
Chris Hentemann (00:11:25):
I helped develop the securitized capital market improvement for what is today Bank of America. I spent almost 12 years there.
Chris Hentemann (00:11:33):
Fascinating experience. It was in the last '90s and early 2000s when the banks were pretty much given a license as class [inaudible 00:11:40] was effectively repealed, and to expand into more investment banking related functions. We developed a business around it where we could use all the strengths of a bank and all the basically the skills that we had structuring and trading and understanding how securitized finance fit into the capital market of the banks based on the broader financial universe.
Chris Hentemann (00:12:06):
And helped develop the origination, the structuring, the trading, and even some of the proprietary lines of business across all the residential mortgage spaces. Commercial real estate, all the different aspect groups. And structured credit and credit derivatives such as CLOs, both in the US and in Europe.
Chris Hentemann (00:12:25):
I consider that really actually one of the really important foundations for what we do because similar to Clay, I think we both basically like ... we knew we had a differentiated skill. We liked to manage risk and had a pretty good knack for it.
Chris Hentemann (00:12:43):
And also realized that there's a lot of value in actually being in these markets, particularly through cycles, credit cycles and straight cycles. But also the evolution of the product as it became more institutionalized, particularly through a cycle like 2007-08.
Chris Hentemann (00:12:59):
As Clay had referred to, you really see some of the strengths and weaknesses of how a market develops and evolves. It was almost the perfect inflection point for me to do what I really aspired to do, was basically leverage all that experience and start a firm similar to what Clay had done.
Chris Hentemann (00:13:15):
So I launched 400 Capital in October of 2010. Sorry, 2012. We did it on a very modest amount of capital. Most people don't realize it was really challenging. But I think it was for the better in the long run. We started with a few million dollars of forensic family capital and developed the hard way off of track record and basically the knowledge base that we could deliver to client in that post-GFC environment.
Chris Hentemann (00:13:45):
We developed a firm today that's just under $4 billion and has a range of different products. Again, similarly we really have basically interact with clients as a conduit to the structured finance space, offering based on the ability on total return or more patient capital, through more patient capital vehicles. The ability to get access to very unique returns that hopefully we'll be able to articulate over this next hour, across RNBS, CNBS, and asset based and crossover forms of credit markets.
Chris Hentemann (00:14:23):
That's how I got here.
Troy Gayeski (00:14:25):
Yeah, that's great. Great to hear that, Chris. TJ, please keep it brief because we're already running out of time.
TJ Durkin (00:14:32):
Sure, sure. Never fun to go last. But yeah, really briefly. I ended up going to college here in New York City. That gave me the opportunity to have an internship at Bear Sterns on the mortgage trading desk. So similar to Chris, this is all I've ever really been doing.
TJ Durkin (00:14:49):
Rose up the ranks there to managing director on the mortgage trading desk. Stayed all the way till the end, until JP Morgan merger and had the opportunity to continue my career on the sell side there if I so chose. Or thought at that point it would be a really interesting opportunity to go to the buy side, try something new, and come to an existing platform such as Angelo Gordon, but that really was not exposed or had exposure in the mortgage or structured credit space in any material way.
TJ Durkin (00:15:24):
Fast forward 12 years here, we have a team of 25 people here that I lead. I'm the mortgage ABS consumer space, up and down the capital structure, whole loans, securities, etc. That's where we are today.
Troy Gayeski (00:15:41):
TJ, succinct as always. I got to love it, man. I got to love it. No offense, Clay and Chris. No offense.
Troy Gayeski (00:15:48):
Guys, prior to the COVID-19 pandemic and all the chaos in the markets that we've experienced here since the second and third week of March, can you guys take us back to January this year and explain to the audience why you were positioned the way you were? Long structured credit assets.
Troy Gayeski (00:16:06):
And I'm going to ask TJ to start out this time, since he went last time. If that's all right with you, TJ.
TJ Durkin (00:16:14):
Yeah, absolutely.
Troy Gayeski (00:16:15):
Talk about particularly consumer ABS and also RMBS of it as well, why you thought those assets were very attractive.
TJ Durkin (00:16:24):
Yeah. I think stating the obvious, obviously we came into March with historically low unemployment and we'd been grinding down towards that rate. What that had been doing in the background over the past probably 18-24 months had really helped support wages.
TJ Durkin (00:16:41):
As there was a need for more employees, employers had to effectively pay up to get them. We saw that trend really start I guess back in '17-'18 and continue through to where we got to, call it March 1st of this year. Really in particular we saw a lot of tailwinds in the lower and medium wage earners.
TJ Durkin (00:17:05):
Which is a large part of in particularly the consumer ABS market. The wealthies debts aren't really securitized. Their mortgages are held on bank balance sheets. American Express on the credit card is using their deposit. So that's really when you think about structured credit a lot of it is the middle class and working their way down.
TJ Durkin (00:17:26):
And so we saw quite healthy fundamentals there on the income side. On housing, just over the last 10-12 years we did not keep up with household formation. There's structurally a shortage of particularly affordable housing.
TJ Durkin (00:17:45):
When you think about the collateral supporting residential mortgage bonds, it's really what's the value of that house. It was very hard to construct a scenario where we thought there would be material downside in terms of that asset price over the coming two to five years.
TJ Durkin (00:18:02):
And so there was a lot of fairly obvious supports to owning this credit, coming into 2020.
Troy Gayeski (00:18:13):
Got you, TJ. Thanks for that summary. Chris, if you don't mind, could you talk more specifically about RMBS? Because that's obviously a very large sector exposure for your firm. And feel free to dive into LTVs, equity, FICO/Vantage scores, etc.
Chris Hentemann (00:18:32):
Yeah. It's going to connect well with what TJ just mentioned. I think a lot of the things that he had mentioned are really the foundation for how we have made the same decisions.
Chris Hentemann (00:18:42):
You had a very strong consumer, that's in jobs is actually very important to that, and actually it's even more critical today in terms of having a view. We'll talk about future. But this is a much different employment environment than we had at the beginning of the year.
Chris Hentemann (00:18:58):
A very strong foundation for employment, wages, etc. So obviously your credit to the consumer is strong. We picked up on a couple things. I will add to it that in the post-GFC environment, bank regulations, particularly around mortgage credit origination like qualified mortgage rules, really haven't retreated much. They had been well in place.
Chris Hentemann (00:19:23):
We have a good consumer with a good job base beginning of the year, relatively delivered or lightly, like on a historical basis, of very balanced balance sheet. We've been in a low interest rate environment for a long time, so consumers have access to great cost of funds. Debt service coverage actually also was very good at the consumer level.
Chris Hentemann (00:19:50):
You had very good features in the consumer. And then the origination of credit, particularly in the mortgage universe, around the way rules were constructed in the conventional market and the private label market. We had actually what we would consider well disciplined credit origination.
Chris Hentemann (00:20:07):
Actually in a lot of cases we thought it was too conservative and mispriced. The mispricing comes from not only basically looking at high FICO, low levered consumers in a great consumer friendly environment, you also had relatively low LTVs in appreciating housing environments with very good technicals. I'll add that too.
Chris Hentemann (00:20:32):
The US housing market still remains about 2 million units short in terms of housing supply versus demand. We think that's going to still exist and it's what's actuating a sustainable housing environment even through the COVID crisis.
Chris Hentemann (00:20:48):
Then you have rating agencies. You can't miss the rating agencies because they actually are an important function to credit origination. The rating agencies after the financial crisis nearly lost their license to rate structured finance deals, given basically since the poor performance in the financial crisis.
Chris Hentemann (00:21:03):
They have the classic sort of pendulum shift as well, like the banks did, in terms of conservative underwriting. And so we saw that a lot of the origination in terms of mortgage credit was very conservative from a ratings point of view.
Chris Hentemann (00:21:15):
You nest all that together and you actually have a really good, really attractive environment to invest in.
Troy Gayeski (00:21:25):
Got you, got you. Clay, one of the differences between you and Chris and TJ is you've had more of a focus on the agency CMBS multi family market. Can you talk about the fundamentals there coming into the year prior to COVID-19?
Clay DeGiacinto (00:21:42):
Yeah, sure. It seems like so long ago now. I would echo quickly what Chris and TJ mentioned.
Clay DeGiacinto (00:21:51):
Thematically, structured credit is currently and was, even before COVID, a structurally cheap asset class. Primarily due to the re-regulation of global banks and insurance companies. I think where we tend to invest and likely where others tend to invest that have private money, is at a part of the capital structure which is really punitive for most banks and insurance companies.
Clay DeGiacinto (00:22:20):
I call it the fulcrum part of the capital structure or the part of the capital structure that matters most to really being right about the credit. It's not the equity, but it's certainly a first loss of mezzanine part of the debt capital structure.
Clay DeGiacinto (00:22:35):
That is quite a yieldy asset class and we get to enjoy making decisions about risk relative to return. But generally global banks and insurance companies have to think about risk relative to return relative to regulatory capital. Frankly, nine out of ten times that regulatory capital tends to be the constraint.
Clay DeGiacinto (00:22:56):
I know we're going to talk about how cheap the market is now. Frankly, I think it's cheaper than it was post-COVID. But it was even a pretty interesting buying opportunity pre-COVID. We probably 50% of our investment are centered around CMBS and commercial real estate, with a significant bend to multi family.
Clay DeGiacinto (00:23:18):
We're experts in commercial real estate, equity, all the way through the debt tranches. We even have an origination business where we'll lend on the mezzanine part of the capital structure, often behind bank first lien mortgages. But what I think is interesting is, given the universe of CMBS, we've never invested in one conduit CMBS B piece. But we highly favor multi family B pieces.
Clay DeGiacinto (00:23:45):
In particular, agency multi family B pieces. We have a relationship with Freddie Mac on their small balance B piece program. This is a program that was originated back in 2014-2015. They originated about $8 billion a year.
Clay DeGiacinto (00:24:05):
In general, these are all of the loans are following the Freddie Mac guidelines, which are fairly stringent throughout the country. There's different underwriting guidelines depending on what pocket or specifically ... as we all know, real estate is hyper local, specifically what geography they're originating in. All cash flowing assets, no development, no brownfield, no greenfield. No transitional loans. With occupancies certainly greater than 90.
Clay DeGiacinto (00:24:35):
But what I think is most important, and really the reason why we were very attracted to this is the small balance multi family loans in particular, it's sort of the workforce housing. These are 20-50 unit garden style low rise apartments, geographically dispersed all throughout the country.
Clay DeGiacinto (00:24:53):
These loans are being made not from a lender that's really focused on driving profitability. This is a policy decision. Both Freddie and Fannie also have a regulator in the FHFA that has a dual report to Treasury and to Congress. Specifically housing affordability is their number one mandate.
Clay DeGiacinto (00:25:20):
That includes multi family lending. Let's make loans affordable so that housing becomes affordable for the multitude of renters. We specifically like the workforce because we thought it was pretty defensive from a macroeconomic viewpoint.
Clay DeGiacinto (00:25:40):
We've been in expansion now for 11 or 12 years. I would say that credit may feel a little bit toppy or heady. We think about the cashflow profile of the asset, we invest in discount dollar price assets that pay us back money over time. We want to make sure that every dollar we put out, we're going to get that money in an amortizing fashion over time and make sure that we get more back than a dollar.
Clay DeGiacinto (00:26:11):
Our ethos at our firm is [inaudible 00:26:13] invest in cash flows and make sure that we get the cash flows back and generate an agreeable return. It's not one where we're focused on spread. Meaning very few people at the firm, at least pre-COVID, would think about let's invest in an asset that we think can tighten because it's just cheap.
Clay DeGiacinto (00:26:31):
We really want to be comfortable with the cash flows. We know that we're going to buy the first loss piece on the debt in these multi family loans with Freddie origination standards. If you go back to the last crisis, and I think there's a lot of parallels from this crisis to the last one, we want to be safe around defaults and performing assets versus nonperforming assets.
Clay DeGiacinto (00:26:56):
Freddie originated multi family through the last crisis. [inaudible 00:27:03] defaults were less than 50 basis points. That's incredible when you think about conduit defaults, which were well north of 10% during the last crisis.
Clay DeGiacinto (00:27:13):
I think we're seeing the same thing this time. Just given the data over the past few months, which I'm sure you're going to ask me a little bit about later.
Troy Gayeski (00:27:21):
Perhaps we'll get into that. Succinctly, TJ, if you don't mind. Could you walk our viewers through some of the crazy price action that we saw? Particularly the last two weeks of March. And what you thought drove that. And then in turn, how much of that price action do you think as technically driven as opposed to fundamentally driven.
TJ Durkin (00:27:46):
Yeah sure. I mean I go back and forth with it now, 90 days later. But it felt like we hit the bottom March 23rd, March 24th, at least in our market. I can tell you I was sitting in the same seat, starting in 2008-2009, for the last version of this.
TJ Durkin (00:28:07):
It felt completely different in the sense of that was a slow moving train of deteriorating fundamentals. Chris brought up rating agencies were flawed, they were kind of playing catch up with downgrades. I would tell you most people were, I would say, on the buy side getting excited about buying assets during that time period.
TJ Durkin (00:28:31):
Versus this time around, you could tell it was ... I don't want to say completely technically driven, but 90% of the price volatility we saw was technically driven. It was mostly driven by the daily liquidity bond funds and mutual funds, the 40 Act funds, that were getting redemptions.
TJ Durkin (00:28:50):
I think it's pretty clear we've been living in a low interest rate environment. People don't really keep their assets in their savings account anymore. It's in these bond funds to get some more yield. The virus caused panic, it caused fear, and people wanted that liquidity. So they pulled assets from those bond funds.
TJ Durkin (00:29:13):
Those managers just needed to sell. It wasn't about making a decision of relative value. It was sell anything that you can get a bid on. We saw irrational prices being reported. Intraday, day over day. Obviously we're heading into a worse employment situation, economic situation.
TJ Durkin (00:29:37):
But where we saw what I call bomb proof bonds, AAA bonds, being for lack of a better term puked out, just because someone needed cash, really told you that it was way different than the last time around. And almost predominantly all technically driven.
Troy Gayeski (00:29:56):
So would it be fair to say we've basically got '08, an entire year of '08 price action, in two weeks?
TJ Durkin (00:30:03):
Yeah. Yeah. I think we got that in two to three weeks versus what probably took 15-18 months last time.
Troy Gayeski (00:30:10):
Mm-hmm (affirmative). Mm-hmm (affirmative). Got you. You think roughly 90% of that was technically driven?
TJ Durkin (00:30:16):
I go back and forth. If we were sitting there in March, 75%. The further we get away from it, it feels ore like 90, 95. I'll stick with my 90.
Troy Gayeski (00:30:26):
Got you, got you. Chris, since the dark days of late March, all of your portfolios have rebounded quite substantially. What do you think has driven the rebound? Is it principally technicals? Is it Fed policy? Is it the fundamentals haven't gotten as bad as people feared? Is it some of the fiscal stimulus in terms of the direct stimulus checks, as well as enhanced unemployment?
Troy Gayeski (00:30:54):
When you go through the factors that you evaluate a security with, what do you think's been the key driver of rebound so far?
Chris Hentemann (00:31:04):
If I had to give you one word it's information. What information comes into the market that allows you to basically invest prudently.
Chris Hentemann (00:31:13):
The first piece of information that came in in those, on March 23rd, was that the Fed was going to open up QE4. We've seen this before. This is an easy playbook in structured finance. Buy mortgages. Don't look back.
Chris Hentemann (00:31:30):
I mean mortgage bases moved three points. Three points in 48 hours. It's unprecedented. So the Fed came in and they said we are going to do whatever it takes, unlimited, to basically make sure that we actually can transmit affordable financing to the largest basically borrowing base. Which is residential market. Pretty significant.
Chris Hentemann (00:31:54):
It's kind of like the first driver of the rebound. Then things fall off of that. So then you have the policies that come off of that within probably a week or three weeks after that. Again, further information comes to the market.
Chris Hentemann (00:32:05):
Because the first piece of information we all pretty much didn't know was what TJ was just reflecting on, was how much is technical, how much is fundamental. We're all redialing all of our models to say how much impairment is really embedded in these markets.
Chris Hentemann (00:32:18):
And so while we're doing that, the Fed is feeding us new information. So within things that are very relevant, and there are very few of them that are relevant to the structured finance market unfortunately, were programs like [inaudible 00:32:31].
Chris Hentemann (00:32:32):
Even the CARES Act as it started to develop helped our market, because feeding cashflow into the consumer, or PPP, feeding cashflow into small businesses to put a floor under employment, ideally a few months down the road is helpful in a first or second order way for a lot of our credit decisions.
Chris Hentemann (00:32:54):
Corporates, high yield, municipals, had much more first order support form the Fed this time than the GFCs. Probably rightly so because industries are really really under duress, in a very very short period of time.
Chris Hentemann (00:33:08):
So all that came into the market, I would say, in the late March, early April. Again, feeding more information into the market and you can see basically, as TJ had mentioned, the higher part of the more liquid, the more bomb proof, using TJ's analogy, parts of our market recovered pretty quickly. The easier trades were after you got done buying government guaranteed mortgage-backed securities you go and buy the AAAs, you buy the AAs, you buy the As. And that's where you're going to get liquidity. It's where you're going to get your best trade, so to speak.
Chris Hentemann (00:33:40):
Thereafter then, ideally you're going to get enough information from the market in terms of what sense will we get. Will this be a V, will it be an L, will it be a V, will it be a U, will it be an L. What are the magnitude of employment, what's the magnitude of unemployment going to be. What is it going to do to housing and asset prices.
Chris Hentemann (00:34:02):
So I think we've got a lot of information in the last few months, and I think it's allowed a lot of us to actually really, with our expertise, dive into the mezzanine and lower parts of the capital structure and parse through what are exceptional opportunities. Because what's evolving is you're seeing that some of these things that we spoke about very early in terms of our beginning of the year forecasts, are still in place.
Chris Hentemann (00:34:28):
Like I mentioned, technicals and housing market, if anything they've probably tilted more in our favor. That's the cost of financing real estate assets has actually become very attractive. Cash flows are speaking through to the consumer that we're seeing that the actual data in terms of auto payments and other consumer receivable payments, even mortgage payments, are moderating.
Chris Hentemann (00:34:52):
So we're getting more information. Those are the drivers, to get really right to it, Troy, that are allowing us to basically start to feed capital in and make prudent decisions.
Chris Hentemann (00:35:04):
I think the hardest ones are going to be how our operating companies, or more operating related exposures, going to basically react. It's going to take a longer time to determine. So things like how is consumer behavior going to affect how hotels, people are going to travel, or retail. Those are the ... airlines.
Chris Hentemann (00:35:23):
Those are going to be the challenging, longer recovery cycle sub sectors, as I think most people [inaudible 00:35:32] would be able to figure out. But again, it's information as it's coming into the market. As soon as we can digest it, make a prudent decision, we can pick through things that are truly just technically repriced and make good investment decisions and take advantage of the rebounds.
Troy Gayeski (00:35:48):
Clay, you want to speak briefly about multi family? How much was technical versus fundamental? Obviously the level of rent payments has hung in there much better than people thought. You've had some spread tightening back from the wide. You want to give a little color around that?
Clay DeGiacinto (00:36:06):
Yeah, sure. You asked a very good question that I've been processing now for a few months. And that was the selloff technical or was it fundamental.
Clay DeGiacinto (00:36:18):
I think TJ did a great job of explaining to it, but the last two weeks in March was one of the strangest trading environments I've ever incurred in my career. If I were to-
Troy Gayeski (00:36:30):
One of? One of, Clay?
Clay DeGiacinto (00:36:31):
One of. One of.
Troy Gayeski (00:36:31):
Okay.
Clay DeGiacinto (00:36:33):
If I were really to try to set the stage, or frame what was happening, mid March the entire Wall Street was work from home. Nobody was prepared for that. Every single bank on Wall Street has massive disaster recovery centers with fancy computers and multiple screens. Nobody's used to work from home on their cell phone and on iPads, which they can't really ... the salespeople aren't interacting with the traders who aren't interacting with other salespeople, and really feeling the pulse of the trading environment.
Clay DeGiacinto (00:37:05):
You couple that with being at the end of the quarter, there's a stress for cash. Most banks that had credit lines outstanding, they were being called upon. So these contingent liabilities that were being called upon. Everybody was in cash preservation mode.
Clay DeGiacinto (00:37:21):
I think a lot of the price action, not only was there daily demand of mutual funds that were selling, in fact some of them sold on a Sunday bid list, which was also the first time.
Troy Gayeski (00:37:34):
First time ever. Right, Clay?
Clay DeGiacinto (00:37:34):
First time I've seen it in my career. But also it was a liability driven issue, where repo or margin lenders who also levered firm balance sheets to try to make a spread on what their cost of capital was versus where they could lend on assets, there was a real margin constraint.
Clay DeGiacinto (00:38:01):
I think when you look at returns today, or if you were to try to look at returns over the past few months, you'll see that I think the differentiated returns streams is really a function of how people were levered. Those that were most levered probably did the worst.
Clay DeGiacinto (00:38:18):
I think it's important to think about was the loss a function of mark to market, or was it a function of crystallized losses. Because people had to sell and raise cash to pay off margin lenders or redemptions if it's a mutual fund, etc.
Clay DeGiacinto (00:38:36):
I think that March performance, or the March prices, was 90% liquidity, probably 10% fundamental. I think we've flip flopped that today where liquidity is back in the market, repo lenders are back in the market. I think a lot of people have changed their borrowing book and either reduced it significantly or extended out from a term in maturity perspective. Paying up to lock in term repo.
Clay DeGiacinto (00:39:04):
But I also think that the environment that's presented in front of us is significantly different than the last global financial crisis. Where coming out of that crisis assets were priced yield to worst, that's quite true today. There's many assets priced yield to worst.
Clay DeGiacinto (00:39:22):
But what's different is last time I think you could almost buy anything, and you saw this recovery through both spread tightening as well as fundamentals improving. When I look at the landscape today, certainly on all parts of the structured credit market, although liquidity is back and you're going to see some spread tightening at the top part of the capital structure, I think there is and will continue to be real fundamental stress through the system.
Clay DeGiacinto (00:39:50):
Like Chris said, we effectively get new data once a month. That's data that tells us how people paid or what the transitional role rate matrix of defaults was during the last month. We can infer from that and try to have predictability around the future cashflow profile.
Clay DeGiacinto (00:40:08):
But there's you've probably seen people, there's been tens of billions of dollars raised for their sector right now. Which I think is quite interesting, but the investment philosophy cannot be one where it's just buy it because this is a replay of the last crisis.
Clay DeGiacinto (00:40:26):
I think it's really important to know and understand. I know the three of us on the panel, I feel comfortable saying this because I know that we all have systems. We've been in business 10 years, we have default and prepayment models that are pretty dialed in at this point in time. And that's going to help us make decisions for the future, for the future cashflow profile of some of these assets.
Clay DeGiacinto (00:40:50):
The buying opportunity is as good as we've ever seen it. Lots of assets are traded at 50 cents on the dollar. That's not traded at 50 cents on the dollar because there's a general consensus that the principal balance will lose 50%. I think it's trading at 50 cents on the dollar because people are really uncertain what's going to happen. You know?
Clay DeGiacinto (00:41:13):
Half can pay off at par and half are going to go to zero. That's a tremendous opportunity for folks with models, with analytics, that have invested in this asset class for a long time, certainly coming out of the last financial crisis.
Clay DeGiacinto (00:41:29):
You talked about multi family, if you give me a few more seconds. The idea that we can now buy assets at a yield to worst mentality, and that means that we can ramp up expected defaults, we can slow down expected prepayments, and still buy assets with a mid to high single digits yield, I think is pretty significant.
Clay DeGiacinto (00:41:52):
We haven't seen this buying opportunity for a long time. When you couple that, I always use this concept called yield to worst. So it means that in structured credit, spread or price is the last thing that we think about. We first have to be right about our forecasted defaults and recoveries and prepayments.
Clay DeGiacinto (00:42:12):
When you make all of your assumptions fairly onerous and you're still able to earn mid to high single digits unlevered return, the upside is quite significant. We're investing in these type of assets, multi family like I mentioned before, I think is relatively defensive.
Clay DeGiacinto (00:42:32):
Most of the assets that are backed by the loans that we own are trading below replacement value. Cap rates are in the 5, 6, 7 percents. The DSCR assets are well covered. I think that these forbearance programs are really working.
Clay DeGiacinto (00:42:53):
The CARES Act, which goes through the end of July, is interesting because specifically in workforce housing, where we think the average income is around $24,000 a year in that asset class, in class C multi family, the CARES Act is allowing these folks to earn about 170% of their prior weekly employed cashflow.
Clay DeGiacinto (00:43:21):
So there's a lot of excess dollars in the system and they're paying their rent. That then is leading the owners to be able to pay their mortgage. We're seeing that throughout.
Clay DeGiacinto (00:43:32):
So I think there's been some fiscal stimulus that's been good for the consumer, it's been good for a lot of the asset classes that we're investing in.
Troy Gayeski (00:43:42):
Yeah, that's great. I'm always going to TJ for succinct. He's my man, you know? But well said, well said.
Troy Gayeski (00:43:51):
Just give us a few data points, TJ, if you don't mind. Key word a few, on how fundamentals look today. Particularly the last two to three weeks versus where market assumptions were or expectations were as recently as four to six weeks ago.
TJ Durkin (00:44:09):
Yeah. I actually don't think that the market's expectations on fundamentals have been grossly wrong, or grossly conservative. As Chris pointed out, our business is driven off of data. So the more we get, I think the more comfortable we get with the tail scenario of what's the downside that Clay just walked through.
TJ Durkin (00:44:30):
There's been a lot of talk about mortgage forbearance so maybe I'll skip that. We've been investing with non-prime credit card companies. A non-bank, they're looking at lower FICO borrowers, mid 600s, smaller credit lines. They've been in business since 2003, so they lived through the last cycle, if you will.
TJ Durkin (00:44:53):
What we saw ties exactly out to what Clay just mentioned. In the months of April and May, and it's continuing on, the credit card companies getting their highest payment amounts in per month. So if someone has an outstanding balance, their borrowers are paying it down at a higher propensity than in their now 17 year history.
TJ Durkin (00:45:20):
And so it's a function of there's not a lot to do, everything's closed. So people are not spending money, per se, and people want the utility of having a credit card. So for what would be considered a non-prime borrower, we're seeing delinquency rates that do not tie out to a double digit unemployment rate.
TJ Durkin (00:45:46):
That is a function of the CARES Act and that's a function of people generally came into this with decent balance sheets, as I think Chris mentioned. So I'll leave it there. We can certainly talk about mortgage forbearance rates, etc., but that's certainly getting a lot more press than some of the other consumer products out there.
Troy Gayeski (00:46:04):
Yeah. I'll let Chris talk about forbearance requests really quick, because that is an important topic obviously for the housing market. Chris, could you briefly describe where markets expected forbearance a request to go and where they've actually hit a ceiling and have started to decline the last three weeks?
Chris Hentemann (00:46:22):
Yeah. It's an incredibly complex topic, quite frankly. I think everybody is in the spirit of giving the consumer firm ground to recover from such an unprecedented crisis.
Chris Hentemann (00:46:40):
The spirit of getting consumers back on their feet, I think we all have to unanimously support. So forbearance is really key to that, and so is giving people the room to manage their payments in the short term. Then how those plans reverse and how many people, what we always call roll rates, how many roll into a true delinquency and how many recover is really the inflection point of what we have to monitor and pay attention to.
Chris Hentemann (00:47:14):
You've seen, and as you alluded to, the data, it's still you got to look at a series. But in the short term, we've seen a slow recovery in terms of overall mortgage forbearance rates. They've peaked in the overall mortgage market in the mid eight. So about literally roughly about call it 8.5% of US mortgages were in some form of forbearance.
Chris Hentemann (00:47:41):
And then the stratification of that 8% falls into different buckets depending on what type of borrower you are. We've seen what we call the conventional or the typical Fannie Freddie borrower with roughly around a 7% forbearance rate. And then you get Ginnie borrowers which tend to have lower FICO scores, higher loan to values, less equity in the homes, may actually have less savings and these lower FICOs and they struggle to make payments. Those have been in the 12% range.
Chris Hentemann (00:48:22):
So you've seen different results in terms of forbearance uptake over the last couple months. And then in the non, what we call the GCS world of the private label mortgage world, you've seen a slightly better experience. Roughly around 6%, which you have prime borrowers that are roughly around 3%, which is still shockingly high for a very prime borrower. Then you have alternatives, which depending on the type of loan product, could be high single digits to high double digits.
Chris Hentemann (00:48:54):
So there's a lot of basically different results in terms of the uptake of forbearance plans. What we have seen is people that even take up forbearance plans have been paying to a certain degree. So I think some people are looking for the room, just like the corporates have been doing. The corporates have been hitting the primary market for liquidity because they realize they have to create reserves for their business models because they don't know how long it's going to take to get airplanes back up in the sky, to get hotels back online.
Chris Hentemann (00:49:21):
So just like what corporates are doing, the consumer's doing as well. And so they're looking for these plans to try to build some [inaudible 00:49:27] liquidity.
Chris Hentemann (00:49:28):
The last couple weeks we've seen some of that actually recede. We're seeing people get a little bit more confident about their situations and we're seeing some of that actually start to plateau. Which is a really good sign. We optimistically think that that actually could improve quite a bit.
Chris Hentemann (00:49:45):
I think we [inaudible 00:49:48] view that in this interest rate environment, particularly where you can get a mortgage, a conventional mortgage with a 2% handle to it, you'll see a lot of people basically want to keep their optionality to refinance mortgage debt. So you would likely see some of that start to recede as people take advantage of the refinancing environment as well.
Troy Gayeski (00:50:10):
Great, Chris. That's a great summary of the improvement, or at least the lack of deterioration in the data, followed by some improvements so far.
Troy Gayeski (00:50:18):
All right, guys. We've talked about how most of the sell off is technical. We talked about how fundamentals never got as bad as people feared. We've talked about, more briefly than I would've liked, about how fundamentals have improved from less bad levels.
Troy Gayeski (00:50:35):
Could we talk now briefly about the path to recovery? Again, it's hard to put numbers around it but I'm sure our viewers are very interested in hearing what do you think is a realistic return stream. What do you think the upsize surprise would be, what types of compounded returns and absolute returns can you guys put up over the next six, 12, 18 months.
Clay DeGiacinto (00:51:00):
Troy, we think we own the bonds in our main funds that you're invested in, right around a mid to low teens type yield. Something like 13 or 14%.
Troy Gayeski (00:51:15):
Was that higher than risk free, Clay? Is that higher than risk free?
Clay DeGiacinto (00:51:20):
A little bit. Right? I'm sort of myopic within structured credit and trying to think about the micro sectors that are interesting within structured credit. Listen, there's allocators all over the world that have a much tougher job, that have to think about structured credit relative to other assets.
Clay DeGiacinto (00:51:36):
When I think about an aircraft ABS or a legacy resibond or some of the stuff that we're seeing commercial right now, compared to equities. It's an equities market where Hertz can go from 75 cents to 5.50 or $6 in a matter of a few weeks. I sort of just scratch my head and I think structured credit is perhaps the most fundamentally cheap sector in the investible universe right now.
Clay DeGiacinto (00:52:05):
We own our book at mid teens type yield. That's not assuming spread tightening. That's just a function of cash flows that will come from the assets that we own. Both interest and principal. This is a great market. We get paid down every single month, right? We can do nothing.
Clay DeGiacinto (00:52:24):
In fact, tomorrow is remittance day, the 25th of every month is when we find out how the predictability, or what we assumed would've happened, what actually happened during the month of May. So we get excited about that. We call it pay day.
Troy Gayeski (00:52:39):
I want to [crosstalk 00:52:40].
Clay DeGiacinto (00:52:40):
But listen. With spread tightening, Troy, I think a very high teens or low 20s type number is completely achievable. I wouldn't say just over the next 12 months. I think that's sort of like a compounded 18 month or two year type opportunity.
Clay DeGiacinto (00:53:00):
The path to get there is a little bit more difficult. But I know that staying the course and receiving these cash flows month in, month out, is a pretty good way to get back our money.
Troy Gayeski (00:53:14):
Great. Great, Clay. TJ, my man.
TJ Durkin (00:53:17):
Yeah. We probably have a slightly different book than Clay. But we see our unlevered assets in the high single digit yields. We probably a little bit more higher in the capital structure and we do use some leverage in the book.
TJ Durkin (00:53:33):
And so if you go back to March, some of those assets were getting marked down, given that forced selling that we saw. Luckily we were not forced seller and we were able to hold on to almost all of our assets and we're now seeing that recovery back.
TJ Durkin (00:53:50):
We see a cash on cash yield over the next 12 months in the low double digits. We're running about a four and a half year spread duration. So if you look at corporates, just as [crosstalk 00:54:02].
Troy Gayeski (00:54:01):
Four and a half year unlevered, right, TJ?
TJ Durkin (00:54:03):
Unlevered. Unlevered. And so if you look at corporates, just as a natural competing product for yield buyers, if you impound a 100 base points of spread tightening, that's about nine points of total return to call it 12-13% cash yield.
TJ Durkin (00:54:20):
Again, you can pretty easily see a 20% gross return in a 12 month period. And you're not getting anywhere near the spread levels, a 100 tighter, that you saw coming in to Feb. So there's a lot of room in the middle between where we are today and saying that you have to get all the way back to February.
TJ Durkin (00:54:39):
We don't see that as a necessary event to generate those type of returns. There's a lot of room in the middle.
Troy Gayeski (00:54:47):
Chris, how about you?
Chris Hentemann (00:54:50):
I can only support what they said. I think this sector is as attractive as it's been since the last financial crisis. And largely driven from everything we just talked about, there's no better environment to invest in than when technicals overwhelm the market, overwhelm the fundamentals.
Chris Hentemann (00:55:06):
So obviously the desperate reach for liquidity in March forced prices so low they went below fundamental value. What we always see is that this sector's complicated and it takes expertise to invest in it. You just can't buy the ETF off the shelf and basically expect it to bounce back.
Chris Hentemann (00:55:29):
And so what's fantastic about it, it's frustrating for certain investors. You have to have some patience to it. Everybody asks oh, am I going to get the balance back in April. Well, the good thing is, is that if you have the patience, you're going to get ... the market got repriced due to heavy technicals, as we've all discussed.
Chris Hentemann (00:55:47):
The bounce back doesn't necessarily come back in April because, like I said, data and other information has to come out. But as it's coming out, you're starting to see this positive trajectory higher. And so we did make adjustments for what we think our new fundamental work has, we all did it.
Chris Hentemann (00:56:04):
I think I concur with the group here, is that even making provisions for what is going to be a more challenging recovery environment and the breadth of outcomes, because I don't think there's one clear, easy path to predict. I do think it's a mid to upper teen return.
Chris Hentemann (00:56:20):
What I might amplify is actually I think that those are unlevered. I think that's key, is that a lot of our strategies, as you've heard here, is I think we respect the fact that putting leverage on top of illiquid or relatively illiquid assets is kind of a dangerous combination.
Chris Hentemann (00:56:38):
I think what we're describing here is that there's ... this is an asset class trading below fundamental value. There's data coming out that supports basically the recovery trends. It will take some time. It's generally going to produce really attractive returns on an unlevered basis.
Troy Gayeski (00:56:58):
Great, Chris. Well, guys, I have to hop on a client meeting or a client call. Viewers, we appreciate you tuning in. And want to thank Clay, TJ, and Chris for joining us.
Troy Gayeski (00:57:09):
Now I'm going to turn it over to my colleague, John Darsie, who's going to give Q&A that came in from the audience during our session. Thank you so much, everyone. Have a great day.
John Darsie (00:57:19):
Yeah. We have several audience questions. I want to thank the audience for your participation. The first one is about mortgage rates and interest rates. Do you see interest rates going negative? And if so, what impact do you think that would have on the mortgage market and the real estate market?
Clay DeGiacinto (00:57:35):
That's a hard one. I don't see rates going negative. I think there's plenty of unintended consequences with negative rates. Frankly, I think that zero should be the floor.
Clay DeGiacinto (00:57:48):
What's interesting about mortgage rates, and they're at all time lows, I think certainly they're at all time lows in the agency mortgage market. They're at all time lows in the nonagency mortgage market. I think for your audience today, if you can come across or if you can take with you one thing that you should go forward after today, is to try to refinance. I think rates are exceptionally low right now.
Clay DeGiacinto (00:58:18):
But what's interesting about that refinance and the space that we invest in is the dollar price that we own our assets. And I just looked at this. Pre-COVID the average dollar price of our book was around 87 cents on the dollar. Still at a discount.
Clay DeGiacinto (00:58:35):
But post-COVID, the average price of our book right now is 70 cents on the dollar. So every refinance that comes through the system is quite beneficial for the forward cashflow profile of what we own. And so perversely, low rates is a really interesting contributor to positive P&L for discount pools of mortgage credit.
Clay DeGiacinto (00:59:01):
I think that the Fed will keep mortgage rates low, relative to the risk free rate. And frankly, I think a lot of banks and insurance companies that are trying to match their assets to their liabilities, love the mortgage asset because it can still have lot of duration even at these levels.
John Darsie (00:59:22):
All right, I'll hop to a different question that I'll direct at Chris. There's a few questions about the CMBS market that I'll sort of aggregate into one.
John Darsie (00:59:30):
What do you think ... CMBS last month had a record default rate of around 8%. What are the implications of that? And then longterm as people look at how they operate their businesses, do you think there'll be any longterm disruptions to [inaudible 00:59:46] within office buildings?
Chris Hentemann (00:59:50):
I think the answer's simply yes. I think you're seeing it play out as we speak. People are going to think about how office is used, and it's going to be used differently in the short term.
Chris Hentemann (01:00:04):
Right now it's not getting used at all, for the most part, in a lot of the major MSAs. How people reenter the office environment is going to be to be determined. Right now in New York City, you can only occupy 50%.
Chris Hentemann (01:00:20):
And then everybody's gotten so good at using basically the work from home environment. This panel actually speaks to it. I mean used to have this huge production out in Las Vegas and look at you're putting us all into the same environment very comfortably, from our own homes. It's fantastic. We've all learned to adapt.
Chris Hentemann (01:00:42):
So it's going to direct how office is used. I think the WeWork model, I don't want to call it long gone, but it's pretty much out of sight for a while. So that form of it's going to be gone, and there's probably going to be excess capacity. That's what's going to drive some of these default rates, particularly in office.
Chris Hentemann (01:01:02):
I mentioned hotel. Hotels kind of a soft spot. How people travel, how people use hotels is going to be really challenging. It's going to be another part where you can see default rates rather high.
Chris Hentemann (01:01:13):
Retail, again, the same thing. There's going to be retail has been under duress for a long time. Likely to continue to basically support the default rates.
Chris Hentemann (01:01:24):
I was mentioning the shorting of housing, and household formation is positive. People basically are going to need places to live. If the unemployment environment remains high, people are going to look for affordability products like what Clay was speaking. We have the same view. Multi family is going to be probably one of the oases in the real estate market.
Chris Hentemann (01:01:48):
It's probably one of the most mixed pictures in terms of how different forms of real estate are going to be used going forward. It's going to drive all of our decisions in terms of what we decide to invest in.
Chris Hentemann (01:02:00):
I think hopefully I gave you some leading indications in terms of where we're going to be biased.
John Darsie (01:02:07):
Yeah, that's great. We're going to wrap it up with one more question here for TJ, before we let you guys go. And thanks for doing a little overtime with us.
John Darsie (01:02:14):
I know distressed credit is not necessarily exactly where you fit in, TJ. But we have a question about the distressed credit cycle and traded credit and whether the speed of the selloff that was liquidity driven, as we've talked about, and the subsequent recovery. Has the opportunities in the distressed credit space disappeared? Or do private distressed opportunities make a little bit more sense in this environment?
TJ Durkin (01:02:39):
No. We have a very large distressed business here and I can tell that's why you asked me that question. But if you go back to before COVID, the fundamental building blocks of how I think we were investing was the consumer's in good shape, housing's in good shape.
TJ Durkin (01:02:57):
And everyone was focused on the quality of leveraged loans, the lack of covenants, the leverage going into the corporate space, and it was blinking yellow to say the least. And so this is only, I think, pulled forward a lot of the balance sheet issues.
TJ Durkin (01:03:17):
Just like Chris talked about retail, retail was a problem before COVID. Obviously it's been exasperated by it. So I think you're seeing the sound investment grade companies that had those sharp technical selloffs, those opportunities are gone for March.
TJ Durkin (01:03:33):
But you're going to continue, I think, to see a very healthy pipeline of restructurings that I think, again, we're in the model for maybe 2020, maybe 2021. But people were setting up for it, it just got pulled forward a lot.
TJ Durkin (01:03:50):
The Fed isn't looking to take credit risk. They've made that very clear. They're looking to support the markets. I think there'll be plenty to do in distressed.
John Darsie (01:04:00):
All right. Thank you for that, TJ. Again, Clay, Chris, TJ, thank you for joining us.