Tim Gramatovich, cio of Gateway Credit Partners, answers SCI's questions

Q: How and when did Gateway Credit Partners become involved in the securitisation market?
A: Gateway Credit Partners is the credit platform of B Riley Financial’s investment advisor subsidiary B Riley Capital Management and was established in March (SCI 26 March). Our strategy is to identify and acquire undervalued non-investment grade corporate credit securities and implement our portfolio management services through actively managed CDO structures. We are value investors in the credit market.

I have over 33 years of experience in leveraged finance and was formerly co-founder and cio of Peritus Asset Management, which issued two cashflow high yield bond CDOs - one in 2003 and a follow-up in 2005 (Peritus I CDO). I brought with me a four-person team to B Riley: we’ve been working together for over 15 years now.

The common thread in today’s environment is that it is necessary to have scale and stability, from compliance resources all the way through to capital. B Riley has the opportunity to co-invest in all of our deals.

Q: What are your key areas of focus today?
A: We see interesting opportunities in the secondary loan market at present. We have seen retail outflows from ETFs and mutual funds for 20 straight weeks and this has caused some downward pricing pressure, which presents a good entry point to many secondary loans.

Given the length of the credit cycle, we are highly cognisant of risk, particularly as it relates to what we see as insanely aggressive addbacks to increase reported cashflow numbers. Today we have pushed the boundaries of sanity with what is called “pro-forma further adjusted EBITDA.”  So many reported levels of leverage are dramatically understated, which is why an active approach to credit risk is key.

Our focus is on matching the opportunity set with the correct structure, credit selection and active management. We aim to create value by building a portfolio that has around half the leverage metrics of the broader market (at around 3x), yet significantly exceeds the yield of the market.

As we develop the portfolio – including both high yield bonds and leveraged loans - we’ll let the market dictate the optimal structure and timing of issuance. Employing CDO technology is interesting and appropriate, given the lack of mark-to-market risk and liquidity constraints involved. We’re open to other vehicles, as long as they have rational liquidity constraints.

Another thing we have done historically is to protect our structures from rating migration. Rating agencies tend to issue blanket downgrades when the tide goes out. As such, a large triple-C bucket (north of 20%-25% historically) is also crucial for deals to be protected in the current and future environment.

Q: How do you differentiate yourself from your competitors?
A: Our focus is on the asset side of the ledger. We consider ourselves adept at managing bond and loan portfolios.

We are not structured credit investors, but use structured credit vehicles to term finance our portfolios appropriately. The portfolio will determine the appropriate capital structure, not the other way around.

We include both bonds and loans in our structures to both reduce risk and increase the opportunity set. We are somewhat agnostic on the security, as our focus is on the spread and yield per turn of leverage – whether that is represented by a bond or loan is secondary.

Importantly, we believe size is something we can continue to arbitrage. Rating agency models favour size and longevity, so punish companies (with poor ratings) who are deemed smaller (sub US$1bn in revenues).

We expect our average tranche size to remain under US$500m. This would be considered a hybrid between a traditional broadly syndicated loan CLO and a middle market deal.

We typically look to allocate US$5m-US$10m per name. At that level, we’re not being disruptive, but still have enough stroke to negotiate good execution. This is the sweet spot for us, as that range is too small for most CLO managers.

Q: What is your strategy going forward?
A: We expect that over 90% of our investments are likely to be sourced in the secondary market, but we’d like to keep access to the primary market open when markets become challenged. The team has a long history of being able to execute trades in the secondary market – it is highly reputational and good relationships are crucial to success.

Corinne Smith