Figure 1: Aggregate Yield Against Credit Rating
What is Structured Credit
Structured credit involves the packaging of cash flows from different sources including mortgages, credit cards, auto loans, aircraft leases, corporate loans and other types of receivables into marketable securities. These securities offer many benefits to fixed income investors who are seeking to diversify their traditional unsecured credit risk exposure and source alternative forms of income and total return. Some of these benefits include degrees of structural protections such as subordination, over-collateralization and excess spread.
Why Invest in Structured Credit?
We view structured credit as an attractive alternative to traditional unsecured credit. The sector, which varies greatly across collateral types, can offer investors diversification benefits, higher ratings, predicable cash flows and in some cases, lower interest rate sensitivity. Broadly speaking, we maintain fundamentals remain sound across the structured credit market, where the US consumer’s balance sheet is strong, incomes are rising and unemployment sits near all-time lows. Moreover, the floating-rate features of some securitizations benefit from a “higher for longer” policy environment.
In the mortgage market, forced selling by banks and the FDIC has driven spreads to near historical wides while commercial real estate has been tainted by concerns over office properties. It is worth noting that office-related financing accounts for less than 20% of commercial real estate debt. Even within this sector, certain properties are able to retain tenants and sustain rents. Outside of the office sector, our research indicates fundamentals remain very strong. Continued growth in e-commerce is driving demand for warehouse space while higher mortgage rates are driving demand in the multi-family sector. Accordingly, we believe opportunity exists to take advantage of the considerable yield and total return potential.
Key Takeaways for Investors
- High quality structured credit spreads are trading at or near historical wides and we believe absolute yield levels are very compelling;
- Quantitative Tightening (QT) and FDIC selling from its acquisition of failed banks is driving spreads wider, particularly for residential mortgage-backed securities;
- Higher interest rate volatility is weighing on the sector in the near-term;
- The shift to remote work has led to lower values for office properties; however, office properties account for less than 20% of outstanding commercial real estate debt;[1]
- Select high quality office space continues to retain its value;
- We see significant opportunity in multi-family and warehouse space; and
- Residential mortgage credit, including credit risk transfer securities, are enjoying upgrades as they de-lever over time.
[1]. Source: Moody’s, as cited in Reuters, “Office CRE in US at risk from rising interest rates, work from home”, June 20, 2023.
Why MacKay Shields?
MacKay Shields has deep expertise in the structured credit markets and maintains it is uniquely positioned to capitalize on market opportunities. The team operates with a disciplined top-down and bottom-up investment process. For more information on MacKay Shields’ structured credit capabilities, please reach out to steven.buckley@mackayshields.com.
SOURCE INFORMATION
“Bloomberg®”, “Bloomberg Indices®”, Bloomberg Fixed Income Indices, Bloomberg Equity Indices and all other Bloomberg indices referenced herein are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indices (collectively, “Bloomberg”) and have been licensed for use for certain purposes by MacKay Shields LLC (“MacKay Shields”). Bloomberg is not affiliated with MacKay Shields, and Bloomberg does not approve, endorse, review, or recommend MacKay Shields or any products, funds or services described herein. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to MacKay Shields or any products, funds or services described herein.
COMPARISONS TO AN INDEX
Comparisons to a financial index are provided for illustrative purposes only. Comparisons to an index are subject to limitations because portfolio holdings, volatility and other portfolio characteristics may differ materially from the index. Unlike an index, individual portfolios are actively managed and may also include derivatives. There is no guarantee that any of the securities in an index are contained in any managed portfolio. The performance of an index may assume reinvestment of dividends and income, or follow other index-specific methodologies and criteria, but does not reflect the impact of fees, applicable taxes or trading costs which, unlike an index, may reduce the returns of a managed portfolio. Investors cannot invest in an index. Because of these differences, the performance of an index should not be relied upon as an accurate measure of comparison.
The following index may be referred to in this document:
BLOOMBERG US MORTGAGE BACKED SECURITIES INDEX
The Bloomberg US Mortgage Backed Securities (MBS) Index tracks fixed-rate agency mortgage backed pass-through securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage.
BLOOMBERG US CORPORATE BOND INDEX
The Bloomberg U.S. Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by US and non-US industrial, utility and financial issuers. Bonds must have a $300 million minimum par amount outstanding. Callable fixed-to-floating rate bonds are eligible during their fixed-rate term only. Bonds that convert from fixed to floating rate, including fixed-to-float perpetual, will exit the index one year prior to conversion to floating-rate.
BLOOMBERG BAA CORPORATE INDEX
The Bloomberg Baa Corporate Index measures the Baa-rated, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
BLOOMBERG NON-AGENCY INVESTMENT GRADE CMBS INDEX
The Bloomberg Non-Agency Investment Grade CMBS Index measures the market of conduit and fusion CMBS deals with a minimum current deal size of $300 million that are rated investment grade or higher using the middle rating of Moody's, S&P, and Fitch after dropping the highest and lowest available ratings.
J.P. MORGAN EMBI GLOBAL DIVERSIFIED INDEX
The J.P. Morgan EMBI Global Diversified Index (EMBIG) tracks liquid, US Dollar emerging market fixed and floating-rate debt instruments issued by sovereign and quasi-sovereign entities.
IMPORTANT DISCLOSURE
Availability of this document and products and services provided by MacKay Shields LLC may be limited by applicable laws and regulations in certain jurisdictions and this document is provided only for persons to whom this document and the products and services of MacKay Shields LLC may otherwise lawfully be issued or made available. None of the products and services provided by MacKay Shields LLC are offered to any person in any jurisdiction where such offering would be contrary to local law or regulation. This document is provided for information purposes only. It does not constitute investment or tax advice and should not be construed as an offer to buy securities. The contents of this document have not been reviewed by any regulatory authority in any jurisdiction.
This material contains the opinions of certain professionals at MacKay Shields but not necessarily those of MacKay Shields LLC. The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and opinions contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Any forward-looking statements speak only as of the date they are made and MacKay Shields assumes no duty and does not undertake to update forward-looking statements. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of MacKay Shields LLC. ©2023, MacKay Shields LLC. All Rights Reserved.
MacKay Shields LLC is a wholly owned subsidiary of New York Life Investment Management Holdings LLC, which is wholly owned by New York Life Insurance Company. "New York Life Investments" is both a service mark, and the common trade name of certain investment advisers affiliated with New York Life Insurance Company. Investments are not guaranteed by New York Life Insurance Company or New York Life Investments.
Information included herein should not be considered predicative of future transactions or commitments made by MacKay Shields LLC nor as an indication of current or future profitability. There is no assurance investment objectives will be met. Past performance is not indicative of future results.
NOTE TO UK AND EUROPEAN AUDIENCE
This document is intended only for the use of professional investors as defined in the Alternative Investment Fund Manager’s Directive and/or the UK Financial Conduct Authority’s Conduct of Business Sourcebook. To the extent this document has been issued in the United Kingdom, it has been issued by MacKay Shields UK LLP, 80 Coleman Street, London, UK EC2R 5BJ, which is authorised and regulated by the UK Financial Conduct Authority. To the extent this document has been issued in the EEA, it has been issued by MacKay Shields Europe Investment Management Limited, Hamilton House, 28 Fitzwilliam Place, Dublin 2 Ireland, which is authorised and regulated by the Central Bank of Ireland.
NOTE TO CANADIAN AUDIENCE
The information in these materials is not an offer to sell securities or a solicitation of an offer to buy securities in any jurisdiction of Canada. In Canada, any offer or sale of securities or the provision of any advisory or investment fund manager services will be made only in accordance with applicable Canadian securities laws. More specifically, any offer or sale of securities will be made in accordance with applicable exemptions to dealer and investment fund manager registration requirements, as well as under an exemption from the requirement to file a prospectus, and any advice given on securities will be made in reliance on applicable exemptions to adviser registration requirements.
“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company.
当資料は、一般的な情報提供のみを目的としています。
当資料は、投資助言の提供、有価証券その他の金融商品の売買の勧誘、または取引戦略への参加の提案を意図するものではありません。
また、当資料は、金融商品取引法、投資信託及び投資法人に関する法律または東京証券取引所が規定する上場に関する規則等に基づく開示書類または運用報告書ではありません。New York Life Investment Management Asia Limitedおよびその関係会社は、当資料に記載された情報について正確であることを表明または保証するものではありません。
当資料は、その配布または使用が認められていない国・地域にて提供することを意図したものではありません。
当資料は、機密情報を含み、お客様のみに提供する目的で作成されています。New York Life Investment Management Asia Limitedによる事前の許可がない限り、当資料を配布、複製、転用することはできません。
New York Life Investment Management Asia Limited
金融商品取引業者 登録番号 関東財務局長（金商）第2964 号
一般社団法人日本投資顧問業協会会員
一般社団法人第二種金融商品取引業協会会員
Subscribe to get MacKay Shields insights delivered to your inbox.