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HomeMy WebLinkAboutReports - 2019.07.03 - 32240Introduction to Opportunistic Credit An Overview for Oakland County July 17, 2019 2 Important Disclosure Information This presentation is intended solely for the named recipient. It is the proprietary confidential work product of AndCo Consulting and is not intended to be reproduced or distributed to the public. Any information contained in this report is for educational and informational purposes only and should not be construed as a recommendation regarding any particular course of action. Past performance does not guarantee future results. Information is based on sources and data believed to be reliable, but AndCo cannot guarantee the accuracy, adequacy or completeness. The source for all data, charts and graphs is AndCo Consulting unless otherwise stated. The information provided is valid as of the date of distribution or the as-of date indicated and not as of any future date and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after such date. AndCo Consulting is an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability. 3 Defining Credit Classes Credit strategies tend to fall into one of three categories –Performing, Stressed, and Distressed. Performing: Liquid securities trading at a fair value based on the characteristics of the security (coupon, credit risk, maturity, and other factors). This segment includes investment grade and below investment grades securities. Stressed: Semi-liquid securities trading at below fair value based on the characteristics of the security (coupon, credit risk, maturity, and other factors). These securities trade at a discount (~10% to 30%) due to a number of issues –market factors (i.e. market panic) , industry factors (i.e. drop in oil prices), or company factors (i.e. poor sales). This segment is predominately below investment grades securities. These securities will gravitate to Performing or Distressed over time. Investment strategies in this category generally involve months to years to unlock value. Distressed: Illiquid securities trading at below fair value based on the characteristics of the security (coupon, credit risk, maturity, and other factors). These securities trade at deep discounts (~30% to 90%) due to a company specific issues –potential bankruptcy or in the process of corporate restructuring. Investment strategies in this category generally involve years to unlock value. 4 Introduction to Opportunistic Credit Opportunistic Credit offers investors exposure to a broad range of investment opportunities, including bonds, loans, convertibles, real estate debt, emerging market debt, collateralized securities (CLOs, CMOs…) and/or other fixed income related securities. These strategies assume additional risks in the pursuit of potentially higher returns. Credit Risk: The risk of loss resulting from the borrower’s failure to repay the loan’s interest and/or principal. Interest Rate Risk: The risk of loss resulting from a change in interest rates. Liquidity Risk: The risk of loss resulting from the lack of a market in the security. Market Risk: The risk of loss resulting from a decline in the overall market. Opportunistic Credit managers attempt to reduce risk concentrations through diversification –investing across asset classes, industries, companies, geographic regions, and other risk factors. 5 Introduction to Opportunistic Credit Opportunistic Credit managers attempt to utilize their investment experience to generate strong risk-adjusted returns. The managers tend to exploit market inefficiencies to generate their returns. Credit Strategies: Managers purchase fixed income securities of companies selling at an attractive price to the market. Based on the manager’s credit research, the company is expected to repay their obligations (interest and principal). Stressed Strategies: Managers purchase fixed income securities of companies selling at a meaningful discount to the market due to industry/company related issues. Based on the manager’s credit research, the company is expected to repay their obligations (interest and principal). Liquidity Strategies: Managers offer liquidity to fixed income market participants at times of stress, purchasing securities at a discount and holding them until the market returns to more “normal” conditions. Opportunistic Credit tends to avoid distressed securities due to the length of time associated with the investment/bankruptcy process. 6 Introduction to Opportunistic Credit Opportunistic Credit generally focuses on performing and stressed securities, depending on the strategy and expertise of the portfolio management team. Geographical Diversification: May be U.S. focused or global. Investment Horizon: Strategies focused on performing and stressed securities will generally have a shorter “harvest” period than distressed focused strategies. Vehicle Structure/Term: Strategies focused on more liquid securities may be offered in a commingled fund structure with limited liquidity (i.e. 25% access each quarter). Strategies focused on more illiquid securities may be offered in a limited partnership structure with no liquidity (i.e. proceeds from security sales are distributed to the limited partners). Fees: Typically asset-based fees are assessed; some strategies may also charge a performance-based fee.