Jordan Milman, global head of structured products at Hayfin, answers SCI's questions

Q: How and when did Hayfin become involved in the structured credit market?
A: Hayfin launched a structured credit offering in 2012 and since then has invested over €1.7bn through more than 200 transactions, generating gross returns of 11.9% for 2H20.

In June 2020, I joined the firm - along with John Hanisch - to lead the expansion of Hayfin's structured products mandate, which had most recently been concentrated in US and European CLOs and European commercial real estate investments. The firm had become increasingly active on the CLO new-issuance side in both Europe and the US, and for some time had been considering how it might expand its footprint in structured products.

The significant market dislocation resulting from Covid-19 catalysed our decision to broaden and diversify the structured products mandate at Hayfin, with a focus on long-term investing via closed-end vehicles. We would bring to the table a more diversified focus across asset classes, structures and investment themes.

Q: What are Hayfin’s key areas of focus at the moment?
A: We are seeking to build on Hayfin's legacy in a manner that is consistent with the principles that underpin Hayfin’s other credit strategies – that we can best serve our investors by employing a broad investment mandate and looking at the widest possible range of opportunities and structures therein. Our current focus is on private structured transactions backed by a diversified range of cash-flowing assets, including commercial real estate, residential real estate, consumer and related loans and corporate loans. We will also be opportunistically investing in public securities backed by similar collateral.

Q: To what extent has the structured products team been involved in the CLO market?
A: Structured credit is a highly interdisciplinary and global asset class, and there are clear synergies to growing our presence in parallel with the continued development of Hayfin’s other relevant strategies. That includes US CLOs, where we are able to collaborate on credit analysis with a team that has completed almost US$2bn in new issuance since 2018.

Q: What is your strategy for the other areas of the business?
A: Hayfin’s flagship private credit strategies leverage the firm’s local sourcing model to build relationships with sponsors and borrowers across Europe and gain access to investment opportunities not seen by other lenders, and 2020 was a record year in terms of private credit investment activity. There is a significant opportunity set of bespoke or directly originated private loans which sit at the intersection of our private credit and structured credit strategies, and we are able to collaborate with the private credit team on these.

Q: How do you differentiate yourself from your competitors?
A: Our team has extensive investment experience through a range of market cycles. Our most important differentiator is the specific avoidance of many of the investment strategies that proliferated over the past several years in a reach for yield and exacerbated the drawdowns related to Covid-19 in the spring. That is, an over-reliance upon financial leverage and a mismatch in liquidity between assets and liabilities within fund structures.

We are seeking to serve as an alternative to traditional structured credit funds by focusing on longer-term capital to invest in private structured transactions, as well as opportunistic investing and trading in public markets. This allows us to focus on fundamentally-driven outcomes and exit strategies, while limiting asset-liability mismatch and exposure to short-term price volatility.

Q: Which challenges has Hayfin overcome in the past year?
A: We have faced many of the same challenges as the rest of the world, with our offices across nine countries in three continents experiencing lockdowns, restrictions on movement and prolonged periods of remote working. Having joined Hayfin during the lockdown, we were onboarded remotely and have made multiple hires in the same capacity.

Essentially, we are building a business while working from home. It’s been a challenge, but we are proud of how the team has adapted and how efficiently we've been able to operate.

Q: Which challenges do you anticipate may arise in the coming months?
A: While consumer spending continues to improve, the labour market recovery appears to be cooling for now. The unemployment rate continues to fall, but so does the Labor Force Participation Rate and those who report their job losses as temporary. Moreover, the long-term unemployment rate has increased significantly, at roughly a third of those out of work.

On the bright side: industrial production, retail sales, housing and employment data have all surprised to the upside, though the spike in Covid cases may change these dynamics as we move through the winter months. 

In the US market, many of the emergency measures that supported borrowers through the spring and the summer have been phased out. These fiscal stimulus, extraordinary unemployment benefits and forbearance programmes kept many borrowers underlying structured products afloat; it remains to be seen how they will perform with these measures pared back and if permanent scarring is prevalent in the economy.

A new administration and a Covid vaccine have taken some risks off the table, so we feel better about the credit cycle than we did in Q3. But the shift in the balance of power in the Senate and the prospect of a unified government could have meaningful effects on borrowers across virtually all structured products sectors, in both directions – such as via foreclosure and eviction moratoriums, student loan forgiveness, CRE borrower relief or capital gains taxes.

While most risk assets still possess negative convexity to an underperforming recovery, we feel more confident in our upside scenarios. This particularly applies with respect to highly distressed assumptions around Covid in the CMBS, CLO and ABS sectors, especially relative to pricing assumptions underlying broader markets. 

Q: Which opportunities are you expecting and how do you intend to capitalise on them?
A: Public markets have presented distressed investment opportunities, particularly in CMBS and CLOs, and the private opportunity set has proven highly robust. Commercial and residential real estate lending, credit risk transfer and consumer finance opportunities have allowed us to tailor our exposure to specific market subsectors with stronger economic tailwinds, while avoiding technical factors that have driven market pricing beyond where we see attractive risk-adjusted returns in many securitised asset classes.

Our focus continues to be on private structured transactions, as well as relative value trades on the margins of well-trafficked markets, with the benefit of locked-up capital allowing us to focus on fundamentally-driven investment outcomes.

Jasleen Mann