Rizwan Hussain and Pawan Malik, principals of Navigant Capital Market Advisors – the capital markets advisory arm of Navigant Consulting in the UK – answer SCI's questions

Q: How and when did Navigant Consulting become involved in the structured credit market?
PM: Navigant Consulting is a US-listed firm, with around 2000 consultants focused on the health, construction, energy and financial services sectors. Our business incorporates financial analytic and litigation support, investigations and operational consultancy. The firm has office across North America and in the UK and Asia.

Navigant's financial analytic advisory team in the US, which was augmented by the acquisition of an economic consulting firm called Chicago Partners two years ago, has been advising clients in the financial services space for many years. As the markets evolved, so did our ability to advise clients on structured products and derivatives. In the past three years, we have been involved in advising clients on structured products and derivatives.

The structured products and derivatives solutions (SPDS) practice was set up as an extension of our US practice to help clients with issues arising from the financial crisis. Our role is to provide independent valuation of complex financial products, risk management and restructuring solutions to mitigate derivative and counterparty risk, and analytical support in numerous disputes and litigation cases.
Pawan Malik

Our clients include major banks struggling with legacy debt portfolios, US and European central banks that have provided guarantees or set up bad banks to deal with these assets, the fund management industry and their legal counsel.

RH: We also set up Navigant Capital Market Advisors (NCMA) to provide advisory in the real estate and distressed areas across traditional structured and alternative investments. NCMA is currently undergoing the FSA approval process and we expect this to be in place in the first quarter of next year. NCMA also provides strategic wholesale solutions and execution capabilities with respect to acquisitions, restructurings, divestitures, capital raisings and private placements of debt and equity for the European traditional and structured credit space.

Q: Which market constituent is your main client base?
RH: We've found that clients are interested in not only valuation, restructuring and litigation expertise, but also practical solutions to their problems. For example, helping lenders to divest their non-core assets or setting up operational infrastructures for first-time investors in the space.

PM: There are two different types of sellers in the market at the moment. First are those that have been told to divest non-core assets by their credit committees and those who can either 'park' their assets somewhere else with no restraints or simply remain in the structure hoping the real price will move up to their marks.

Q: How do you differentiate yourself from your competitors?
PM: Our approach is to house a variety of experts, including bankers, traders, structurers, forensic accountants, risk managers, valuations and economics professionals, operational strategists and discovery professionals under one roof so we can work with our clients across the entire lifecycle. Unlike a number of start-up boutiques, we can call on a wide range of resources. The aim is to be a full-service solutions business.

Q: What, in your opinion, has been the most significant development in the credit market in recent years?
RH: The most significant event was the onset of the subprime crisis and tied in with this is Lehman's collapse. Leverage, as well as aggressive marketing and structuring of increasingly sophisticated product, meant that their impact spread globally.
Rizwan Hussein

PM: I agree; in hindsight, the straw that broke the camel's back was the structured credit assets linked to US subprime. There was a general lack of understanding of how complex products work and very few investors really understood the 'fat tail' risks they were taking on.

The Lehman bankruptcy is also throwing up some interesting issues. For instance, it seems that the courts may be leaning towards contract law becoming subordinate to insolvency law. This will change the face of the securitisation market in particular, as rating agencies have relied upon contractual subordination clauses to preserve the rating on notes.

Q: How has this affected your business?
PM: There is a lot of interest amongst clients to use our services as they find the unique skill-sets especially useful at a time like this.

Whereas the US is a more litigious environment and contracts between two parties are open to interpretation in courts, the UK courts have generally frowned on mis-selling claims and most disputes are historically dealt with in-house. However, looking at our work flow and from discussions with senior litigation counsel and clients recently, it appears that a fair amount of work is building up in Europe now.

Q: What major developments do you need/expect from the market in the future?
PM: I'm not sure that the system has felt enough pain yet; financial markets continue to be wrapped in cotton wool, but deep structural change is required. Reform proposals are constantly being watered down and are introduced in phases, which just seem to prolong the comfort zone unnecessarily.

It is also not certain that regulators will be able to force the industry to change. In any event, real regulatory change takes a long time to make any difference, as evidenced by the introduction of the Glass-Steagall Act in the 1930s.

Nevertheless, big institutions could be restricted to be principal and agent at the same time because it is difficult to remain independent.

Equally, investors should spend more time doing due diligence on transactions. Because of the wall of money entering the ABS market in 2006/2007, deals were getting done in days rather than weeks. But now there is greater awareness to analyse and model transactions correctly.

RH: Everyone's talking about 'green shoots' at the moment. But I'm not so sure that the market is on the road to recovery yet - investors are still very cautious and it is difficult to see how sustainable a recovery can be, given current fundamentals. There seems to be a disconnect between what the markets are predicting and what is happening in the real world.

I don't expect the new issue ABS market in Europe to begin thawing until a benchmark RMBS master trust deal is successfully placed with third-party investors. But this will first entail a combination of different factors coming together, including further spread tightening and calmer market conditions.

PM: It will be interesting to see how the banks will continue to fund themselves once the central bank guarantees expire soon. Although the banks are flush with liquidity, it is unclear how much of this will be used to buffer capital against potential write-downs versus lent out to corporates to fund capital investment. I reckon 2010 will be a very interesting year in the markets.

CS