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SALT Conference 2015 Panel IV – Market Metamorphosis – The Evolution of Credit Strategies

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SALT Conference 2015 – Market Metamorphosis: The Evolution of Credit Strategies in a Shifting Market

Hosted by State Street Corporation

George E. Sullivan (Moderator)

Executive Vice President & Global Head of Alternative Investment Solutions, State Street Corporation

Reza Ali

Chief Executive Officer & Chief Investment Officer, Prosiris Capital Management

Deepak Narula

Founder & Managing Partner, Metacapital Management

Jack Ross

Principal & Co-Founder, Waterfall Asset Management

Scott Stelzer

Head of Commercial Mortgage Securities & Trading and Senior Managing Director, Cerberus Capital Management, L.P.

Philip Weingord

Managing Principal & Chief Executive Officer, Seer Capital Management

Notes from the SALT Conference 2015 Panel IV- Market Metamorphosis: The Evolution of Credit Strategies in a Shifting Market

Jack Ross – Structured credit space

Unemployment and consumer defaults is very highly correlated

Rating agency definition – 40% of the asset  backed market below market grade – precludes a ton of

Investors from investing in this market

Reza Ali – Near the top of the credit market

The long only carry trade is dead, and deadly to invest in

Applying hedges to their credit bets

Looking for asymmetric opportunities

Their fund is staying in the legacy CMBS space

CLO space is interesting and many investors have written off the space completely several times

Liability part of the capital structure, BB rated – get a kicker if rates go up

Scott Stelzer – huge run up in real estate prices is NOT sustainable

dislocation in real estate in the bakken, with energy debacle

CMBS market is a real opportunity right now

can short or hedge out easier than RMBS, with synthetics

Philip Weingord – early stages of commercial real estate markets

Securitized market is close to 3 trillion

Hedge funds that focus in our space is about 65B, with leverage maybe 100b –so still a very small role vs the size of the overall market

Looking at mezzanine and subordinated tranches

CMBS pieces selling at 8% vs pre crisis at 2%

Pretty big distressed tranche of bonds

Wall street firms are contributing about one third to this market vs what they used to do

Liquidity is more than efficient right now — but what will happen to liquidity in any sort of downturn

Banks used to be shock absorbers, but they are no longer involved

Liquidity is always OK in a good market…

Deepak Narula – risk appetite for wall street is incredibly low

regulation has caused banks to bank away

investors stepping up to buy loans at large discount

commercial mortgage and loan side is a 10-15 year cycle – typical loan is 10 years with a balloon payment

At the end

These loans are coming due from 2005 – 1.7T in loan maturities coming

Where banks and wall street can’t play – loan market — they cannot buy the loans

The risk and liquidity is held by the buy-side, no longer the banks

The GSE’s are parceling out risk differently than they used too

Asking private investors to take on some of the risk