EXCLUSIVE: Bedrock Looks For Gems In Structured Credit

Tom Burroughes

19 July 2012

Editor’s note: This publication recently interviewed Ariel Arazi, managing partner and co-founder of Bedrock, the private investment office based in London and Geneva. He discusses his views about the structured credit market.

Q. What sort of forms of structured credit do you mainly look at? Can you please give examples?

We are primarily looking at opportunities in US non-agency RMBS .

Post-crisis, 95 per cent of US non-agency RMBS became junk-rated and more difficult to hold for real money; the pre-crisis structured vehicles have largely ceased to exist. This creates opportunities for investors.

Q. Where do you see there being opportunities, when, and why?

There are already tremendous opportunities and these will continue for the foreseeable future. This is largely because of the massive risk transfer opportunity of $3 trillion resulting from the need for banks to deleverage and shed non-performing/non-core legacy assets as they migrate to the Basel III / Volcker regime.

Looking forward we see four major opportunities:

1. European banks selling programs of high-risk-based-capital securitized products in order to comply with new capital requirement legislation;

2. Opportunities to participate with structurings/restructurings of attractive risk;

3. Opportunities to acquire positions from traditional broker dealers as their balance sheets are reduced to comply with new regulation;

4. The recovery in US housing combined with potential government programs aimed at bolstering the market that may lead to sharp changes in borrower performance assumptions.

Q. What remain the main risks here?

The risks for the non-agency RMBS sector specifically are limited liquidity, cash flow uncertainty and exposure to policy/regulation risk. For the whole structured credit market, macro risks and supply/demand pressures may lead to periods of declines.

Q. How does the experience of Bedrock's people shape the view of this firm towards structured credit?

Bedrock’s role is to identify investment opportunities and to select the best suitable managers to execute. Our experience with multiple asset classes and more sophisticated or complicated investments as well as our network of professionals help us take those views.

Q. Is the abuses scandal concerning LIBOR likely to have any impact on this market?

It is difficult for us to say with any conviction what may be the implications broadly for the structured credit market. In general however, if the crisis becomes much larger than it is at this stage, banks may need to sell assets at a faster pace, thus increasing supply. This may lead to technical pricing pressure.