Category: CLOs
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Ron D'Vari, ceo of NewOak Capital, answers SCI's questions
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| Ron D'Vari |
Q: When did NewOak Capital become involved in structured credit?
A: NewOak Capital was founded by James Frischling, previously head of structured credit products at Fortis Securities, and myself (I was previously head of structured finance at BlackRock) in 2008. The firm was created to provide independent and unbiased services in response to the unprecedented challenges in the financial markets. We are experts in residential and commercial mortgage loans, corporate credit and the universe of structured products and related derivatives (ABS, RMBS, CMBS, CDOs, CLOs, CSOs, ARS and CDS).
Q: What has been the most significant development in the credit market in recent years?
A: Over the last six to 12 months it has become clear that the traditional model of managing assets is no longer applicable because the entire debt market has changed and the traditional moral contract between borrower and lender is broken. Instead of an asset manager raising money and then deploying it at their discretion, the new model involves identifying an asset and then finding an interested/appropriate investor. Asset transfers were to some extent driven by accounting reasons or upon the condition of the seller, but now it is necessary to provide what we call a 'certificate of authentication', i.e. a full see-through look at underlying collateral and panorama of different outcomes throughout over time.
Q: How has this affected your business?
A: We saw an opportunity to look at the market in a fresh way: investment management now essentially integrates the investment advisory and trader roles, and requires the creation of a balance of risk and reward for both the buyer and seller. With many large organisations under pressure themselves, there is a chance for smaller, flexible players to maximise value in the structured credit space. Members of our team are highly experienced and have been through two or three credit cycles already, meaning that they have the necessary comprehension of what may be ahead.
Q: What are your key areas of focus today?
A: We have been covering the full range of structured products, but the recent shift has been to CLOs and commercial real estate distressed debt. In commercial real estate, the most hard-hit sector has been what we call 'busted' developments. We deal typically with large portfolios, but lately it has been biased towards complex real estate developments, covering a number of different states, where the developers are no longer in a position to complete the projects. The complexity lies in valuing the asset where the lender is no longer around, the cooperative relationship with the borrower has disappeared and the developer has negative economic interest to finish the project through sales.
We analyse every loan on its own by moving back down the complexity ladder. Historically, investors weren't prepared to do such granular analysis and so securitisation was created to bring liquidity to the underlying assets - but this means that the system is completely unprepared for the kind of analysis that is necessary today.
By re-underwriting each loan, creating a value for the asset becomes a comprehensible, measurable process. But in order to re-underwrite the loan, we need to know what leases there are and where, as well as understand the balance sheet/business plan of the borrower and where the money is coming from.
Over the last 20 years the emphasis has been on building things that are less tangible, so now it is a question of unravelling the value chain. Our model focuses on the raw material and includes several steps before an asset is ready to sell on.
Using a medical analogy, first we identify what the disease is, then we operate using refinancing or loan modification and a portion may have to go to the morgue while another may have to remain in hospital to rest (i.e. it's put into special servicing). Sometimes we'll re-underwrite a loan to make it eligible for an FHA guarantee. An estimated 70%-80% of modifications have to be re-modified, but we made a decision to get the modification right the first time - if you have to go through the process again, the borrower and the market are likely to be in even worse shape.
At any given time, we may be dealing with as many as thousands of assets split into different types. These assets could be related to FDIC auctions or other investors' valuation/de-risking exercises.
We have good relationships in the market and are known to be forward-looking, so investors typically come to us for solutions or new ways of sourcing or hedging their existing risks. We usually explain our processes to them first and then contact them if we think a particular asset or portfolio may fit their strategy and risk capacity.
For example, a number of our customers are private equity firms, which recognise that it is more efficient to diversify via our organisation than creating the infrastructure themselves - particularly if it isn't an asset class they're intending to remain in for the long term. They will look at our assumptions and then judge whether we're adding value.
What is your strategy going forward?
We continue to innovate and strive to stay a few steps ahead of the market and real events. Our strategy focuses on building the-best-in-class infrastructure and expertise base to manage high-touch assets, such as distressed residential mortgages, commercial real estate and leverage loans in large scale in raw (loan) as well as securitised forms, but at the same time not sacrifice any granularity.
Some of the toughest assets to manage will be residential and commercial real estate developments, but that is where the most ability to add value and highest returns are. We have made significant hires in these areas and will continue to do so selectively.
The ability to approach these assets fresh, without any of the old baggage or legacy systems, affords NewOak Capital tremendous advantage over time. We are actively looking at expanding our special servicing capabilities and focus on added-value management.
What major developments do you need/expect from the market in the future?
As bad as the conditions may look currently, we believe we have not seen real wide-spread capitulation in the market as yet. As long as financial institutions are incentivised to keep the bad assets on their balance sheets and finance them cheaply with government-provided liquidity, the assets will not find their way in the portfolios that can tolerate the risk. In turn, the appetite for fresh lending will continue to shrink and delevering will continue.
About NewOak Capital
NewOak Capital is an independent, employee-owned firm founded to provide the highest quality advisory, asset management and capital markets services to a broad range of investors, institutions and their professional advisors globally.
The firm is staffed by a team of seasoned professionals with a broad array of experience across asset classes. Its ultimate mission is to help its clients understand, plan and achieve their financial objectives.
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