Anish Mathur, Founder and Chief Investment Officer, Astra Asset Management
Since the global financial crisis upended the markets in 2007/8, there has been a singular commitment by central banks and governments, at least in the West, to prop up the economy by any means possible.
Since the global financial crisis upended the markets in 2007/8, there has been a singular commitment by central banks and governments, at least in the West, to prop up the economy by any means possible. The scale of quantitative easing has been unprecedented and has, in some respects, led to markets being protected by a ceramic wall; something US equity investors refer to as the Fed Put.
The Covid-19 pandemic, the invasion of Ukraine, rampant inflation and the resultant energy crisis, have all exasperated the situation we see today. This has led to pronounced volatility and a divergence of assets that is getting clearer by the day; something we haven’t really seen since 2007.
As an experienced specialist credit investor with a 10-year track record, the way we view this dislocation at Astra Asset Management is in the tried and tested manner of applying a laser focus to the fundamental value of assets. Since our inception, we have always been an extremely conservative manager, sourcing uncorrelated returns that deliver pure alpha as opposed to levered beta.
Contrarian view on financial sector
Back in January 2020, before the pandemic took hold, our immediate reaction was to liquidate the portfolio and sell assets at par. This enabled us to sit on approximately 40% cash in the portfolio, which we then deployed gradually. While some investors were shorting banks because they thought they would end up holding a large number of NPLs etc., our view was quite contrarian. We believed the only way for governments to get through the pandemic was to use the banks as a liquidity channel. We had full conviction that the financial services industry would remain resilient and would be unlikely to suffer a credit crunch.
We expressed this view by going long subordinated debt on financial services. We ended up holding a number of assets at 60, 70 cents on the dollar, which rallied to par in a short period of time. At the same time, we also identified the AT1 market as being more resilient than others. Selecting a number of Additional Tier 1 bonds (also referred to as contingent convertibles or ‘Coco’ bonds) proved a highly effective strategy for us during this period.
Which brings us to the present day.
Amid this prolonged period of dislocation, we are continuing to deploy capital at the same steady pace, specifically identifying, and providing liquidity to, household names facing distress. Our structured solutions give them flexible capital which the banks are not in a position to offer. This is creating a lot of exciting opportunities, allowing us to come in as a debt provider as well as participate – when markets rise – in the equity upside of these household names.
To illustrate the above point, we are currently engaging with a well-known global supplier to the airline industry. They are experiencing a liquidity crunch and we are in the process of developing an innovative financing solution to help them through the sale and leaseback of certain assets.
There is a lot of interest among distressed debt managers, but we are not in the business of buying unsecured debt to capitalise on stress in the market. We are in the business of providing liquidity solutions in the form of asset-backed financing loan arrangements to corporate borrowers.
Specifically, our focus is on providing mid-sized tickets between GBP20 million and GBP150 million. The companies we lend to have a range of assets including trucks, real estate, intellectual property. Regarding the latter, we are seeing interesting IP backed deals with technology that is highly defensible. They are just one example of the kind of assets that Astra is able to uniquely value and lend against.
In our view, our private credit strategy is idiosyncratic in nature and we are well positioned to seek out investments that are geared to protect our investors against inflation, whether through asset price inflation participation, or through revenue-based participation.
Performance drivers for 2022
Firstly, as we look towards the end of the year, we think a good proportion of our returns will come from more liquid, corporate credit markets, in particular the IG market where we see mispricing opportunities. There are trades due to expire in December that are still being priced at significant discount, offering the potential for good returns without leverage.
Secondly, in some AT1 markets, the pull to call is likely going to be pretty significant towards the end of the year. We have a number of such positions in the portfolio that we feel will drive performance for the next quarter. One of these ‘coco’ bonds, for example, is in a Swiss bank that we think will, more likely than not, get called in January. In the event that we are wrong, it will still get reset at a better price than most other AT1s, meaning we will be holding a higher yielding coupon asset on an investment grade financial institution.
In uncertain times…remain invested
In these uncertain times, it is easy (and understandable) for investors to stay on the fringes of the market and say, ‘Let’s wait and see how things pan out.’
As an active investor, we have strong convictions on where we want to be positioned in the market. Ours is akin to a sniper’s view, honing in on specific opportunities that we feel will best complement, and be additive to, our private credit strategy. For investors who have migrated towards passive strategies over the last 10 years, today’s more challenging market environment could trigger a reevaluation of their exposure to active managers. When heightened volatility disrupts investor sentiment, it is apposite to turn to active managers who have a trained eye to execute on a targeted opportunity set, regardless of the wider market turmoil.
In conclusion, my advice to investors is, ‘Now is not the time to sit on the fringes. Don’t wait and allow the opportunity set to disappear.’
This is, without doubt, a unique time to find uncorrelated alpha in credit markets.