Richard Robb, ceo of CRC, recalls how SCI has evolved alongside the structured credit market in the two decades since the publication's launch
Every thriving industry co-evolves alongside its lead publication. Wall Street has its Journal, advertising has AdAge, and we have Structured Credit Investor. An authoritative forum for news, analysis, data and awards – it makes our industry feel more … real.
A lot has changed since SCI launched, but then again, 20 years is a long time. Looking back at the opportunities in the old days, you might imagine that investing in structured credit used to be easy. Here’s the first sentence of the first investor report that CRC issued in November 2002: “Shortly after launch, the Fund purchased an investment-grade rated Italian balance sheet [synthetic] CLO yielding L+7% (discount margin) and maturing in 2.4 years.” Yes, I’d like some more of that please! But at the time, it wasn’t easy at all.
While spreads are tighter and competitors have appeared on the scene, there’s also more supply to go around. I wouldn’t trade today’s large volumes for conditions in 2002 when pricing was sloppier.
It must be hard for newcomers to appreciate the extent to which structured finance has globalised. A generation ago, Germany was, for many investors, exotic. It was still digesting reunification, and the euro was brand new. Not until the Schröder reforms of 2003 did Germany start to shed its reputation as the “sick man of Europe” and transform into an economic powerhouse.
In the early 2000s, it took hard work to find investors willing to venture into Germany. And Southern Europe was 10 times harder. Most prospective investors – but luckily not all – would flee the room at the first mention of Italy.
Now, CRC does trades in Poland and Greece, and no one blinks. Last year, UniCredit syndicated a €650m SRT deal referencing SME loans in Croatia with ease, and without concessionary pricing for the unfamiliar geography. SCI’s routine coverage of SRTs globally makes such investments less scary.
SCI launched at the peak of financial engineering. To see how far we’ve turned skeptical (and rightly so), consider the risk-weighted asset formula. Adopted in 2005-2006 in connection with Basel 2, it is a quintessential product of its time. Today, you wouldn’t get far blithely suggesting, “let’s assume a two-factor normal model, condition on Y = -3.09, and build our financial system on the risk weights that result.”
The way the Basel 2 correlation formula handles PD is charmingly old fashioned. It assumes that a business cycle downturn probably won’t be the factor that pushes a distressed borrower over the brink to default, so high-PD borrowers deserve lower correlations and lower risk weights, all else equal.
I doubt that regulators today would accept a rule that allowed banks to hold less capital against their most troubled loans, clever theory notwithstanding. At the time, it sort of made sense – I guess you had to be there.
One thing hasn’t changed: SRTs serve a genuine economic purpose. This stems from two core facts.
First, as the Great Depression proved, society has an interest in the safety of banks. For that reason, banks are subject to prudential regulation like no other industry (except maybe insurance).
And second, banks are the natural providers of credit to SMEs, midcaps, large company revolvers and, in some cases, infrastructure and consumers. Structured credit, such as SRTs, is the most effective tool for transferring this risk piling up in banks onto end investors, making banks safer. That’s why we exist. Bond and stock markets can only go so far.
In 2002, CRC’s flagship fund was called the CRC Global Structured Credit Fund. During the GFC, I’ll confess, we quietly dropped the word ‘Structured’. But SCI held its ground.
The term has lost its stigma, and structured credit has come roaring back. I have no doubt that SCI – reporting the news every day and gathering us together at events through thick and thin – helped make that happen.
With US$11bn AUM, CRC invests mostly in structured credit.