Steve Curry and Mike Nawas, partners at Bishopsfield Capital Partners, answer SCI's questions

Q: How and when did Bishopsfield Capital Partners become involved in the structured credit market?
MN: Steve and I each have over 20 years' structured finance experience gained at ABN AMRO and RBS.

The recent turmoil in financial markets has led to unprecedented amounts of government support for the banking sector and market liquidity, a general aversion to structured credit by investors and the need for greater regulation and capital at banks. We believe that this will give rise to attractive restructuring and investment opportunities arising from general de-leveraging of bank balance sheets, government-sponsored economic stimulus packages and fundamentally sound credit risk that is perceived to be tainted by general association with Mike Nawas and Steve Curry                                                     structured finance.

So, after leaving RBS, we decided that what we really wanted to do was to set up our own company to work with clients on these opportunities. We set up Bishopsfield Capital Partners and obtained our licence from the FSA in August 2009.

It has been fulfilling to win mandates because of who you are rather than what it says on your business cards. Because we are personally engaged with only a small team supporting us, we are able to provide clients with a very high quality personalised service. Clients know that they're not simply going to be passed on to a junior; that's where we can add value.

Q: Do you focus on a broad range of asset classes or only one?
MN: We focus on European structured debt. We're involved in two main activities: advising on, arranging and structuring debt transactions; and developing investment partnerships to invest in small-scale, credit-intensive structured debt opportunities.

Our view is that one naturally arises out of the other. We are not active in trading.

Q: What are you working on at the moment?
MN: Our first idea was around TALF, targeting high net-worth investors, but then, while we were setting up, the market rallied tremendously and we realised that the returns - though still good for the risk profile with IRRs of around 9% - were not sufficiently attractive to launch our first fund. However, the experience provided us with some interesting insights on the advisory side of our business that proved to be easier to develop than we had expected in terms of competing with bank balance sheets.

This could be due to the market situation: many corporate clients have been bruised by the crisis. They are used to arranging debt in the most straightforward way, usually relying on their banks, but many have found that banks won't provide them with the balance sheet support they require any longer.

There is less of a panic now, but concerns remain that the market has fundamentally changed. Banks are reducing balance sheet and prioritising their clients, so corporates need to develop alternative sources of funding. In general, US corporates have been more used to diversifying their funding avenues than European corporates.

We're currently working on a reverse-enquiry structuring mandate that should close in April. It's a preplaced deal, sized at a few hundred millions. We've agreed with the client and investors on terms that the investors will buy it, so our mandate is to structure it to those covenants, security package and ratings.

Operational risk continues to be a big issue with the rating agencies; for example, how a securitisation would perform if the sponsor goes bankrupt. In this sense, we're addressing new concerns from rating agencies.

SC: The other deal we're working on is an innovative equipment financing in the transport sector. It will likely involve ECA financing.

We're working on it with a small investment bank, which has traditionally focused on the M&A market. It's a complementary partnership, based on our debt expertise and their corporate advisory experience. The client is a privately-owned company and doesn't do this size of financing often.

Q: How do you differentiate yourself from your competitors?
SC: The competition is principally from banks, but in their advisory businesses they lack independence because they also have a credit relationship to bear in mind. Also, they have lost experienced people.

Investment banks are taking a bit of a beating at the moment because of poor structures and mispricing of complex products in the past. This is an opportunity for us as we give truly independent advice, which is not influenced by the need to cross-sell other products and services.

We don't intend to build a large-scale distribution platform: there isn't much value for us to add there, as there are already a lot of teams in place to do this. We're not ignoring the distribution element, but we've found a number of smaller brokerages and distribution houses to work with on our transactions.

The expectation of other boutiques that do focus on distribution is typically that there are still lots of anomalies in the market and so relative value is in mispriced assets. We believe this, but it isn't our background and isn't client-driven.

MN: We're not tainted by credit relationships and are able to advise clients about, for example, direct placements with institutional investors rather than relying on their banking groups. A key area for us is boardroom advisory in terms of how corporates should arrange and manage their debt.

The crisis has driven the debt management activities of corporates to the top of their board room agendas. It has become what is termed 'share of mind' business in the banking market. This has traditionally been the realm of the M&A sector, but now that debt is higher on the agenda chief executives are beginning to take a personal interest because the ability to access funding can make or break a company.

Q: What has been the most significant development in the credit market in recent years?
MN: The dramatic change in the credit investor base. In volume terms it first moved from long-term real money accounts towards levered money and now it is moving back again to the way it was 10 years ago. Long-term investors are less concerned about mark-to-market volatility and, for structured credit, this is where the future lies: the industry needs to convince them of the longer-term value in the market.

The market will likely see some spread volatility in the future and base rates can only increase, so investors have to make up their minds about where to sit on the spectrum. Liquidity isn't so much of an issue now; it's more about understanding the product and transparency.

We need to step back and re-examine what an investment bank should be all about. It became the case that investment banks were interacting with each other at a far larger scale than their interaction with the real economy. In my opinion, the allocation of risk appetite by banks should be re-balanced towards client transactions rather than proprietary trading business.

The other significant development I'd mention is the hubris of mathematical accuracy in finance. Credit committee calculations were shown to mean little during the crisis because everything was resold and repackaged, so small assumptions had non-linear implications and consequently small problems became large problems by multiple factors. CDS correlations and CDS indices drove prices, but there was too much generic pricing and too little in-depth analysis.

SC: I believe the originate-to-distribute model in its worst guise was a significant low-point for the industry. The model was good in theory: the intention was to transfer risk and create liquidity in the debt markets. But, in practise, originators lost sight of the need for 'skin in the game' to keep them honest.

Consequently, the emphasis is now on better underwriting and risk management processes.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
MN: In terms of opportunities, investors can't always sustain a team to do reverse enquiry; that's where we come in.

SC: The reverse enquiry route is very relevant at the moment. Originators and issuers are nervous about bringing public deals to market that may not be successful and everyone's still trying to read the market in terms of volumes and prices, so it's a bit of a voyage of discovery. Reverse enquiry helps originators and issuers get over this by placing a minimum size of notes with an anchor investor.

On the other hand, investors are concerned that markets have widened too far and will snap back quickly. We have already seen significant spread tightening.

There is a wall of money waiting to be spent and a desire to get closer in order to influence the structure of a transaction. There is money to be made by matching buyers and sellers: investors don't necessarily know how to access certain opportunities.

Q: What major developments do you need/expect from the market in the future?
MN: The global regulatory authorities need to be empowered and act accordingly. To date, regulatory reform proposals in structured credit have been taking too much time to implement and often aren't fundamental enough. The proposed 5% retention rule for structured finance transactions, for example, doesn't have enough teeth - 5% of a vertical slice is most of the time not significant enough.

However, even though it's not that material, the industry is still pushing back. The problem is that there is no committee of practitioners and regulators with a clear mandate to implement reform globally. As it now stands, if any single country takes too much of a lead, their measures wouldn't be popular with their electorate.

And because every decision involves an international consultative process, change ends up taking too long to implement. But the economy is globalising, so regulators can't work individually either.

CS