Jean-Francois Leclerc and Carlo Perri of Polar Asset Management Partners' structured credit team answer SCI's questions

Q: Can you give us some background to SRT at Polar?
CP: Polar has been investing in SRTs since the mid-2010s and more broadly in structured credit for over 15 years. Historically, we have focused on what we call ‘special situations’ - new issuers, new asset classes, innovative structures and difficult market conditions.

Last year we added JF Leclerc to our team, who joined us from a Canadian bank where he led the team responsible for SRT issuances and adding to our existing expertise to support the growth of our platform (SCI 10 August 2023). We also launched a dedicated SRT fund this year in furtherance of the strategy (SCI 17 May).

JFL: Our focus will remain on special situations. We understand that banks want to partner with investors that can support them across different platforms and through cycles. As such, we are looking to expand beyond special situations and become banks’ go-to partner for a full suite of SRT needs.

Q: What does ‘risk-sharing’ mean to you?
CP: Risk sharing is about working with the right partners and having a mutual aligned interest that benefits all parties. While the word ‘partnership’ might be overused in our industry, we truly believe in such an approach and it has been a differentiator for us.

In particular, when working on special situations, banks look for partners with whom they can discuss areas of interest and develop solutions. When properly executed, this approach aligns all interested parties and results in risk sharing.

Q: How significant are barriers to entry in this market?
JFL: I think we need to bifurcate the market into two main segments. First, there are vanilla transactions where the underlying portfolio is comprised of predominately investment grade names. That portion of the market has few barriers to entry and increasing interest from various investors.

The second portion of the market – where we focus – is made up of more complex transactions, either because of a more specialised underlying portfolio or due to more complex structural features. That segment has high barriers to entry.

Banks want to partner with investors who can analyse, add value to the structuring process and have a strong history of transaction closing success.

Such value-add comes from deep expertise in structuring, credit and banks’ regulatory capital and risk management requirements. Fewer investors can offer this type of expertise.

Q: How do you source deals in this market?
CP: Our primary source of transactions is from the institutional relationships that we have with banks that Polar has developed as a hedge fund with over 30 years of history. As a Canadian-based institution, we have particularly strong relationships with Canadian banks. In addition, our global investment mandate provides additional institutional relationships and opportunities with non-Canadian banks as well.

Q: How would you describe your relationship with issuers in the SRT space?
CP: I think issuers see us as value-add and flexible partners. Our approach throughout the investment process is geared towards being a long-term partner.

Q: Is the SRT market, in your view, still relatively under-invested?
JFL: I don’t think we can say that the market is under-invested. There appears to be more capital coming into the space.

I think we must bifurcate vanilla transactions and the more bespoke, value-add ones. New capital seems focused on the former; whereas the complexity of the latter makes it more difficult to quickly deploy without the necessary expertise.

Q: Do you have specific preferences regarding asset classes or jurisdictions?
CP: Over the years, we have been active with banks from Canada, the UK and continental Europe. While most of our transactions have referenced North American portfolios, we continue to work on global portfolios with the appropriate banks.

Q: Do you typically prefer blind or disclosed pools and why?
CP: I don’t think we have an outright preference. Polar’s SRT platform is part of the overall structured credit team, where we’ve been working for decades on transactions referencing blind pools across different products and asset classes.

As such, we’ve developed the necessary statistical expertise and tools to support the credit underwriting of blind pools. So, as long as the bank provides the necessary historical information, we can work on that basis.

Polar also has a strong fundamental credit team. As such, the structured credit team has the right internal partners to evaluate single-name credits for evaluating a disclosed pool.

Q: What does your underwriting approach involve?
JFL: Our adjudication process is anchored in three key pillars: portfolio risk adjudication and structuring; in-depth due diligence of the issuing bank; and a robust governance process. For portfolio risk adjudication and structuring process, we see three main components.

First, we determine the risk profile of the portfolio. For a disclosed pool, this generally takes the form of individual name review by our fundamental credit team. For a blind pool, this is driven by statistical analysis of the bank’s historical performance, supplemented with external data.

Second, once we have a good sense of the risk profile of the portfolio, we work with the issuing bank on terms and conditions (e.g., refining portfolio criteria, tranching, etc.). Based on this, we model expected return under various historical scenarios from expected base case to severely stressed, all supplemented with Monte Carlo simulation.

Finally, we conduct a thorough review of the transaction documentation. The SRT team generally works with Polar’s internal legal (we benefit from having a securitisation lawyer in the team) and external counsel.

Q: Regarding the market this year, what specific trends have you identified?
JFL: The arrival of new entrants is well documented. And this is clearly leading to some transactions being priced more aggressively and/or with features that are more issuer-friendly.

We have observed this behaviour mainly on the plain-vanilla, broadly syndicated transactions, with some concern over relative value. Many banks continue to approach SRT as long-term partnerships, where they work with a select group of investors through market cycles, and everyone seeks to generate win-win transactions.

Q: Do you plan to increase your allocation to the sector going forward?
CP: Yes. Historically, we invested in SRT through our main Multi Strategy Fund and, for larger transactions, we have introduced co-investors. The newly dedicated fund allows it to invest in larger transactions. As this fund is the first in a series, we anticipate allocating more capital and resources to the strategy.

Vincent Nadeau