Hansol Kim, founding partner of structured credit advisory firm Pine Lakes Capital, answers SCI's questions

Hansol Kim

Q: How and when did Pine Lakes Capital become involved in the structured credit market?
A: Pine Lakes Capital launched at the end of 2008. Having spent the last 14 years of my career at Financial Security Assurance, I felt I had something to offer the market in these distressed times and wanted to build a platform through which I could stay on top of the market and in tune with its participants.

For the first seven years at FSA, I mainly focused on the consumer ABS side of the business. In the latter half, a significant amount of my time was spent on developing and underwriting CDOs.

FSA intentionally stayed away from ABS CDOs, so the focus was on CLOs and super-senior correlation trades. Given the explosive growth in the CLO sector over the last three to four years, I was personally involved with underwriting approximately 30 CLOs during that time. During my tenor at FSA, I was responsible for underwriting over US$50bn in transaction volume of structured finance securities.

There are some real opportunities in the market - a lot of assets are trading at very distressed levels. Certainly, for many assets the deep discounts are fully justified, but with respect to others, from my viewpoint as a credit underwriter, they do not deserve to be tarnished with the same brush.

There are assets that we have intimate knowledge of and even the very deals that I helped underwrite are trading at deeply discounted levels, not necessarily for credit reasons. Obviously, the real trick is in knowing how to separate them into 'the good, the bad and the ugly'.

Pine Lakes' goal is to bring to the table the insight and knowledge of the structured market. Until there is a two-way market and price stability and transparency, market confidence will not return. We would like to bring some clarity to the current chaos.

I am expecting two or three other members to join Pine Lakes by the end of January or the beginning of February.

Q: Which market constituent is your main client base? Do you focus on a broad range of asset classes or only one?
A: Right now my clientele fall into two distinct groups: one is those entities that already have exposure to structured finance securities - such as those with portfolios of ABS, but who do not necessarily have the in-house expertise or tools to fully understand the ins and outs in a stressed environment. The other group is those that are seeing the current dislocation in the structured finance market and want to take advantage of it - such as distressed funds and hedge funds.

Obviously, few funds are able to raise new capital at the moment, but in some cases we do see hedge funds with pockets of money in existing in funds and they want to put this money to work in the structured finance arena. Pine Lakes allows them to outsource product knowledge, without staffing up.

Ultimately, the most interesting route would be to manage these assets ourselves. We are in preliminary talks with some Asian investors to try and ramp up a fund. You can see the consulting arm of Pine Lakes Capital as phase one, with phase two incorporating portfolio management.

Q: What is your strategy?
A: In the current environment I think we need to stick with stable assets. Yes, it could be interesting to purchase an ABS CDO tranche for pennies on the dollar, which could make 200% or nothing at all. But that is not what I'm after at the moment.

My target is buy-and-hold CLOs or consumer ABS assets. Consumer ABS assets in particular have a very short average life, which in a mark-to-market environment like the one we are in now can be a positive.

CLOs in the past proved be a stable asset class. Even with the recent overall weakening in the leveraged loan market, we believe that CLOs will be resilient, both on a relative and absolute basis. We also believe that consumer ABS and CLOs have more transparent structures that investors can really tap into.

Q: How do you differentiate yourself from your competitors?
A: I think the main difference is our independence and objectivity. We don't make money crossing bonds or pushing certain products.

Since the only source of revenue for Pine Lakes are institutions that hire us to provide analyses and recommendations, our interests are completely aligned with those of our clients. Also, a larger institution may not be able to speak up against the rating agencies, even if they spot something, given other areas within that organisation which may be dealing with the agencies.

We also distinguish ourselves based on the type of assets on which we advise people. A number of firms concentrate on RMBS, which I think is too volatile and risky, even at the current prices. We are trying to focus on more stable buy-and-hold portfolios rather than those that you might have to suddenly trade out of.

Q: Which challenges/opportunities does the current financial environment bring to your business and how do you intend to manage them?
A: I think the biggest hurdle is that we need financial institutions to come clean in regards to losses. Until everyone comes clean, the current crisis will not go away.

People don't feel confident that the losses reported last quarter are the end of the story. I know it's in human nature to avoid delivering bad news and I understand the reality of running public companies, but 'bleeding slowly' is the last thing we need if we wish to get on the path to recovery.

However, one positive development is that people are credit-focused once again, going back to basics. Risk is forcing everyone to rethink and reassess their assumptions and reality.

There were plenty of transactions I turned down in my former life, which were gobbled up by someone else. Even within the CLO space, investors over the last several years did not differentiate between CLO managers.

There was a sense, both by portfolio managers and investors alike, that anyone could manage leveraged loans. We will certainly be testing this theory in the near future and some investors are not going to be pleased. Of course, we will revert to this euphoric state of invincibility once again when the market recovers, but for now we seem to have got the message.

Q: What major developments do you need/expect from the market in the future?
A: First, we need the market confidence to come back - that will depend on how quickly banks can clean up their books and how the current credit cycle plays out. That will go a long way to price stability, which in turn will lead to buyers coming back.

I think we are also going to see a tighter regulatory environment that will hinder, in the short term, the growth of the market. However, this, in the long run, will be beneficial as investors and other industry participants are forced to properly do due diligence and assess risk in an orderly fashion.

About Pine Lakes Capital
Pine Lakes Capital is a consulting and advisory firm dedicated to finding customised solutions with respect to all aspects of structured credit product investments and portfolio analytics.

AC