The continued low rate environment has resulted in many life insurers intensifying their search for spread product. Directly originated structured credit provides an investment grade option to earn spreads that are meaningfully higher than comparably rated corporate credits, broadly syndicated ABS deals and narrowly syndicated private placements. The spread premium is driven by illiquidity, structuring and size. Besides increased spread, these deals are all secured by physical or financial collateral (e.g., cell towers, middle market loans) which makes this asset class a defensive play vis a vis BBB unsecured corporate credit. The key success factors for such deals include rigorous analysis of the underlying collateral as well as structuring the deal with additional portfolio-level covenants and lender protections. Insurers also benefit from being flexible regarding the sourcing of the underlying collateral. Deal flow tends to be opportunistic with collateral sectors being attractively priced for a period and then becoming normalized as the sector attracts capital.
The COVID-19 health crisis that materialized in the first half of 2020, rattled economies and bond markets around the world. Liquidity, price discovery, and transaction costs were severely challenged across multiple asset classes in the bond markets, from high yield and investment grade corporates to emerging markets and even — for a brief period — U.S. Treasuries. How are fixed income markets responding to externalities like policy and the news? And where is traditional ‘value’ to be found amid more dispersion in fundamentals and universally compressed yields?