(Bloomberg) — For the first time since the 2008 financial crisis, investors can assemble credit portfolios capable of producing equity-like returns, according to Jonathan Dorfman, chief investment officer at Napier Park Global Capital.
The firm is on the hunt for âasset classes that provide a significant risk premium relative to the amount of defaults that might happen if the economy were to develop a more recessionary cycle,â Dorfman said on the Bloomberg Credit Edge podcast. That includes non-investment grade structured credit in the corporate, mortgage, consumer and auto spaces, he said.
The best opportunities often come from transacting with banks, asset holders that have received redemptions from clients for liquidity reasons, and loan originators in areas like US residential real estate that need to free up capital to do more lending, Dorfman added.
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While speculative-grade bonds offer high yields relative to recent history, returns are less noteworthy when adjusted for inflation, according to Dorfman. Standardization and improved transparency have reduced risks in structured credit, which can produce better inflation-adjusted gains than traditional corporate debt, he said.
Banks seeking to shift loan portfolio exposure via synthetic credit risk transfers is another area of opportunity. Dorfman sees âsignificant growthâ ahead, including more deals by US lenders.
âWhat this technology is designed to do if free up capital for banks,â said Dorfman, adding that when bank equity is trading below book value, this is a âmore efficient way to effectively create equity capital than any other method.â
Napier Park has been involved in both public syndicated securitizations and private bilateral risk transfers, he noted.Â
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Dorfman also raised concerns about the rapid growth of private credit, noting âextraordinaryâ differences in the holding prices of the same loans by different fund managers. There needs to be consistent valuation across all asset classes, he said.Â
âItâs become an asset class thatâs heavily driven by what we would call âvolatility washing,â and thatâs a concern as it gets bigger and bigger,â Dorfman noted.
He said any significant change in how the industry marks loans will likely require the intervention of regulators.
–With assistance from James Crombie.
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