Andrea Podesta, head of fixed income, and Armando La Morgia, head of structured finance at KNG Securities, answer SCI's questions

Q: How and when did KNG Securities become involved in the structured finance markets?
AP: The KNG Securities model is based on generating cross-regional liquidity in the context of dislocated markets. We're currently moving onto phase two of our development, which is to enhance the range of products we offer. This involves bringing in specific expertise to further strengthen certain areas of the business; for example, by recruiting Armando to help build our presence in the ABS market (SCI 13 February).

Andrea Podesta

We already have a strong offering in interest rate structured products and convertible bonds, but now we're expanding our focus to include ABS. It is a viable market in the context of the dislocation trade and Armando's expertise is crucial to this effort.

Q: What are your key areas of focus today?
AP: The bulk of our business is focused on Europe, but we also cover Asia and the US to a limited extent. Europe is important because it is a natural home for us.

We generally look at investment grade product and, in the context of this, we focus on the more illiquid assets where we can add real value. We're also planning to move into emerging markets in the foreseeable future.

We mainly focus on secondary market opportunities in ABS. Our job is to add value and that is more readily available in secondary.

Our activity revolves around two lines of business: flow products and solutions. The flow side is aimed at traditional investors in respect of client-to-client trades and cash bond intermediation.

The solutions side of the business involves creating tailor-made packages for a specific client need. We apply our expertise on the pricing side to break down a situation into its constituent parts and then provide advice around an appropriate market exit.

Q: How do you differentiate yourself from your competitors?
AP: The vast majority of our competitors focus on one single area - they don't offer a combined flow and solutions platform like us. For example, ex-traders are most likely to focus on flow or EM product, while former structurers are likely to provide pure advisory services.

Our model aims to gather all of these different elements under one umbrella, with the message that we can do everything that banks can do but without a bank balance sheet. This allows us to provide the same expertise as banks, but at less cost and with more efficiency. We're leveraging the approach of a broker-dealer, without proprietary positions, so we're completely independent.

Armando La Morgia

Q: Which challenges/opportunities does the current environment bring to your business?
AP: At present, we're seeing a quasi-normalisation of activity versus the distressed environment of 2012. The market hasn't completely normalised yet, but we're no longer in extreme fear of a global meltdown. Greece appears to be insulated, for instance, and investor behaviour is acclimatising to this environment.

It depends on client type and regulatory constraints, but a large portion of our work is currently focused on ALM-matching in relation to rates movements. We're also advising a few banks in connection with securitising specific risks on their books and then placing them with specialised investors.

ALM: The structured finance market has moved beyond the stage of being labelled as 'toxic'. The pace of bank deleveraging depends on a number of factors, including the impact of Basel 3 and the potential market turmoil around another European country from the eurozone's periphery.

There was an expectation that banks would dispose of legacy assets and flush the market with assets, but with cheap financing, it turned out that the best vehicles to hold these assets through the recession were the banks themselves. While a deluge of distressed collateral hasn't occurred, the major consequence is that banks have stopped lending to new businesses.

Q: What major development do you expect from the market in the future?
AP: There is a tendency towards continued tightening in the primary market. There is also a sense that the market is consolidating.

However, as spreads come down, a macro recovery could emerge and push rates up fairly rapidly. The market is entering a stable phase, but one that remains vulnerable to shocks related to inflationary pressures.

ALM: Many investors have reassessed ABS with a fresh approach and returned to the market in search of value. ABS pricing has therefore normalised.

Providing negative news regarding the macro situation of certain peripheral countries continues to lessen, tail risk can increasingly be excluded from pricing of peripheral ABS.

In terms of relative value, my personal view is that the peripheral market offers significant opportunities. But such assets need to be considered at the right price and possibly with a hedge mitigating macro exposures to cover tail risk.

I agree that one major issue to be aware of is the interest rate environment. If interest rates rise, it will be an interesting environment for credit. Peripheral countries are already somewhat seeing rate increases at a macro level (although not specifically within seasoned ABS), so it makes sense to assess its impact and take advantage of that experience.

Generally, the two major themes for European ABS in 2013 are the regulatory situation and the interest rate environment. Macro themes to be aware of include Spain and Italy coping with and possibly emerging out of recession.

CS