Matthew Moniot, co-head of credit risk sharing at Man GPM, answers SCI's questions

Q: Could you tell us about your recent move to Man GPM?

A: We joined Man Group in 2022, from Elanus Capital, the firm I founded back in 2010. By 2020 two things were apparent. Firstly the SRT market had grown significantly and was starting to attract large, institutional managers and secondly, technology, an area of focus at Elanus, would be an increasingly critical driver of SRT portfolio management. As we looked for a platform with world class sales, marketing and technology teams and infrastructure, Man Group was an obvious choice for us.

Technology is Man Group’s DNA; it underpins every aspect of the business. Over a third of staff here are computer scientists or data engineers. We operate in a data intensive market, meaning that the integration of Man Group’s computer science and data science capabilities has allowed us to make substantial gains in our analysis and reporting capabilities. This coupled with leveraging the extraordinary salesforce here at Man and being part of a larger global credit platform, means we can analyse exposure and communicate with market participants on an industrial scale.

Q: How is the Man group seeking to extend its range in securitisation and the SRT market?

A: SRT is an incredibly quantitative, data-oriented, and analytic market. It can also be very inefficient. Transaction pricing is not always clear, which can create real opportunity.

Man Group applies much of its technology spend to portfolio and risk management. A significant amount of Man Group’s institutional knowledge can be applied to analysing and pricing credit risk in illiquid form. For instance having the ability to apply real time market pricing to our underwriting and risk analysis is, to us at least, exceedingly important and we think a real differentiator. It’s important to understand our assets not just notionally, but also adjusted for risk and dynamically through various scenarios. By leveraging Man’s quant capabilities, as a team we can quickly run stress tests under various market scenarios to understand and hedge our exposure in an efficient and systematic way.

Q: What, in your opinion, is the greater benefit of investing in SRT trades, versus comparable instruments and asset classes?

A: To start with an anecdote, I used to joke that, when we started the legacy manager, I would show up to various conferences and say: “I’m here to talk about structured credit” and half the attendees would get up and walk out of the room, “and European banks” and the other half would leave. Over the last decade and a half, perhaps in response to regulatory reform, investors have moved away from securitisation and toward direct lending, trading structuring risk for operational risk.

But those same regulatory reforms created SRT opportunities with very little operational and structuring risk. Banks now carry very high regulatory capital charges against their banking book assets. High capital charges create a disincentive to originate and retain these assets but banks cannot do that without losing the relationships and therefore the fee revenue that they need to drive returns. The obvious answer is to keep the asset but sell the risk, which banks can do quickly and easily through SRT. Meanwhile, since the vast majority of these assets are in fact high quality and predictable, investors can generate high quality risk adjusted returns by entering into these transactions – provided they are structured appropriately.

We think that through most parts of the cycle, these are risks that will outperform the rest of the credit markets and most of the alternative investment management space. Sector performance over the past 13 years, while somewhat opaque, largely supports this belief.

Q: What, in your opinion, has been the most significant market development for the European SRT market in recent years?

A: Three issues come to mind. Bank resolution and the treatment of note proceeds which were largely clarified in 2018 with the introduction of the Bank Resolution and Recovery Directive (BRRD). New entrants from secondary markets have begun to issue and we believe US banks are poised to join them at which point this market will be genuinely global. And finally, SRT as an asset class and as a form of credit risk capital was put under some level of stress in 2020 and performed extremely well with banks that issued SRT seeing material benefits in their second and third quarter earnings.

SRT proved itself once again in spring of this year as bank distress served to remind investors that banks can get into trouble and that bank equity and credit are subject to risks far beyond loan portfolios. While holders of AT1 securities saw substantial volatility and in some cases complete write-downs, SRT investments performed largely as if nothing at all was taking place.

We think that these stresses in the banking space should lead to a marked increase in interest from investors. Disruptive as the crisis was, we consider the resulting dynamics highly supportive of the demand for and structure of CRS transactions. 

Q: What trends and challenges do you anticipate to surge for the rest of Q4 and beyond?

A: Corporates have been in an interesting position for the past two years. During the coronavirus pandemic corporates increased issuance but also experienced very high nominal revenue growth which led to increased earnings. Now we are beginning to see the first signs that slower growth, particularly in Europe, and higher rates in the U.S. and U.K., will have the opposite impact with interest coverage ratios coming off cyclical highs.

We suspect earnings will remain fairly strong and defaults fairly low, outside of the furthest fringes of leveraged credit, through year end. However we also think an inflection will occur in 2024, as the impact of slower consumer demand and higher interest expense combines to drive defaults.

Although, given the defensive attributes of the referenced assets and the relatively conservative allocation of capital against these exposures, we expect performance to remain strong and market growth to increase. That noted, the environment will likely become more challenging as we get further into what has been a very long period of credit growth. Managers with experience through cycles, who have the ability to analyse and navigate various markets and to recruit the best underwriters, will become increasingly key to navigating the market’s risks and rewards.

Of course, market growth looks entirely certain as we look at issuers outside of core Europe entering the market for the first time. Canada, and more recently Poland, are a good examples of a rapidly establishing markets, and we are seeing signs that U.S. banks are finally ready to be serious issuers – which will change the market very significantly.

Vincent Nadeau