Kate Galustian, lead portfolio manager for BlackRock Senior Securitised Fund and head of European ABS, answers SCI's questions about the asset manager's new flagship securitised pooled fund

Q: When you announced BlackRock Senior Securitised Fund (SCI 20 November), BlackRock stated that this new vehicle will predominantly invest across continental Europe and the UK. To what extent was that driven by current opportunities specific to that geographic market, and could you provide an outline as to what those are?
A: The fund was designed in collaboration with UK consultants to meet the growing international demand across institutional and wealth clients for securitised assets and the diversification benefits that they offer for clients’ fixed income exposures. 

BlackRock has a long history investing in securitised assets and runs more than US$120bn across its global platform. The fund was designed to draw on the expertise of the platform to determine global opportunities with a 25% bucket for the US and other regions whilst highlighting to clients the focus on the UK and Europe. Each security in the fund will be compliant with the EU securitisation regulation.

Q: Could you share with us a target weighting for ABS versus CLO that the fund will pursue, and what the motivations are behind that?
A: Based on client and consultant feedback, BSSF has been designed to have a maximum exposure of 35% to CLOs. The fund will invest in cash – not synthetic bonds – and is able to access issuance across primary and secondary markets. Our activity in both markets will be dependent upon a combination of valuations and supply technicals. 

Q: Which particular sub-asset classes within ABS are looking particularly attractive currently, in the context of the new fund?
A: Fundamental research has been the cornerstone of BlackRock’s securitised teams’ investment process over the many years the team have been investing in the market. 

During 2023, despite a worsening economic picture, securitised assets have performed well so far with only mild signs of deterioration in certain pockets of the market and significant spread tightening across the major asset classes year to date. We have seen an increase in dispersion between sectors, individual securities, and parts of the capital structure and we expect this to continue to be a theme.

Currently, the magnitude of the pricing difference across the capital structure is particularly noteworthy for European securitised assets – providing investors the opportunity to seek differentiated returns depending on their risk appetite compared to both the corporate credit and US securitised market, where pricing overall appears more compressed. 

Each asset class has its own considerations. For example, within RMBS we see signs of delinquencies increasing predominately in old ‘legacy’ transactions backed by non-prime floating-rate loans originated prior to the global financial crisis, which now make up a small part of the UK mortgage market. Within CMBS idiosyncratic risks exist in the market, particularly in sectors such as retail and office, but risk dynamics remain asset specific.

Regulatory requirements following the global financial crisis have also raised the bar for transparency and disclosure across the market, giving securitised investors a level of transparency and disclosure not typically seen in other fixed income markets – an advantage for many clients. Loan level data supports detailed analysis and modelling of metrics such as arrears and defaults allowing investors to combine their own market, sector and asset specific stresses, applied at time of purchase and on an ongoing basis. 

Q: The fund will have a predominant focus on triple-A securities, what are the key motivations behind that?
A: Working with consultants on the design of the fund, we found that there was strong demand from clients, for example pension funds, who are looking for quality and liquidity. 

In our view, it is those assets at or close to the top of the capital structure, which are typically rated AAA or AA, that are most suitable. These are typically the most protected from a capital preservation point of view and, given the large volume of issuance and number of investors participating in this space, tend to offer more liquidity versus those further down the capital stack.

Kenny Wastell