Canyon Partners to Double New Fund for Left-Out Securitized Debt

(Bloomberg) -- Canyon Partners, the $24 billion hedge fund founded by Josh Friedman and Mitch Julis, is raising a new vehicle to make bets on securitized credit not directly targeted by central bank intervention, according to a person familiar with the matter.

The Canyon Structured Credit Opportunity Fund has raised $170 million since it was started over the summer and is likely to double in size over the next three to four months, according to a person with knowledge of the matter who asked not to be named.

The Los Angeles-based company is targeting stressed and esoteric sectors of the structured credit markets that are not directly supported by Federal Reserve credit facilities such as the Term Asset-Backed Securities Loan Facility, or TALF program. These include some tranches of ABS, collateralized loan obligations, and both residential and commercial mortgage-backed securities.

A representative for Canyon declined to comment.

With rates forecast to remain close to zero for the near future, investors have been seeking safe, higher-yielding alternatives to corporate bonds, and certain segments of structured debt fit the bill. Federal pandemic-relief programs mostly focused on corporate bond markets, while certain securitized sectors such as non-AAA CMBS and CLOs, were left out in the cold.

For that reason, the recovery in securitized debt over the last four months generally lagged that seen in corporate bond spreads. That means that some structured bonds may still offer more relative yield than similarly rated, or even lower rated, corporate bonds and could be poised to rally.

ABS, meanwhile, was a corner of the securitized market that did benefit somewhat from federal stimulus programs such as TALF. As such, it was able to retrace much of the spread widening from the March selloff, however, there may still be pockets of relative value, according to market observers.

The new vehicle is not strictly a pandemic-recovery fund. Instead, Canyon is aiming to construct a portfolio that is resilient across many different types of economic and interest-rate scenarios and is expecting to generate mid- to high-single-digit returns, the person familiar said.

The selections are geared to capture liquidity premiums and the overall portfolio currently has an average rating of BBB, the person said. The strategy also takes advantage of the fact that the yield curve is steeper, which often means there is the possibility of increased growth and inflation.

The fund is targeting senior-rated tranches of aircraft-lease ABS, which were resilient even during the March selloff and are not expected to take a loss, even under conservative stress scenarios, the person familiar said. It is also investing in BBB rated and other mezzanine CLO slices, especially from CLOs issued post-Covid that were put together by disciplined managers. Canyon itself is a CLO manager that issues its own transactions.

Canyon is being more cautious with the CMBS market, which has been hit hardest by lockdowns that prevented people from visiting shopping malls or staying at hotels. However, the fund will invest in a limited number of safer CMBS transactions, but it will comprise a smaller part of the vehicle.

In March of 2019, Friedman told Bloomberg News that the firm was betting more than $1 billion against low-rated, retail-heavy CMBS debt via the CMBX derivatives market, but it’s unclear if the firm has since exited its positions.

The new securitized fund will also invest in agency RMBS, including Ginnie Mae securities, as well as a small amount of legacy non-agency mortgage bonds and debt backed by so called fix-and-flip mortgages, the person familiar said. However, it is generally shying away from consumer ABS, especially unsecured consumer loans.

Canyon has another fund, the River Canyon Total Return Bond Fund, which was started in December 2014 and is more than 70% allocated to securitized credit. It has returned nearly 3% year to date. However, the new Canyon Structured Credit Opportunity Fund is 100% securitized debt, and has a slightly longer lockup period than River Canyon.

Relative Value: Best Structured Product Returns

• Researchers at Bank of America Corp. estimate that the highest expected unlevered excess return will be in CMBS BBB bonds, credit risk transfer RMBS B1 and B2 tranches, CLO BBs, legacy RMBS, esoteric ABS, and UMBS 3s agency RMBS
• These were top-performing sectors in September and the relative outperformance is expected to persist, analysts said in a research note
• Based on new-issue pricing spreads, BofA prefers the retail auto-lease ABS over auto-loan ABS, and the senior tranche of subprime auto-loan ABS over the same for prime auto-loan ABS

Quotable

• “What you have now in commercial real estate is a very unstable environment, and people are looking to take advantage,” said Scott Tross, a partner at the law firm Herrick Feinstein LLP and co-chair of the firm’s real estate litigation department. Tross represents many special servicers. “The commercial real estate market is notoriously cyclical. What winds up happening is, properties are taken from property owners who are less well capitalized, and they wind up in the hands of people who are better capitalized. From my perspective, this is a not bad development at all. I view it as a positive. The properties wind up in the hands of people that have the ability to take care of them.”

What’s Next

ABS deals in the queue for next week include offerings from Hyundai Capital America (prime auto), GM Financial (auto floorplan), Business Jet Securities (aircraft ABS), Santander Consumer USA (prime auto lease), and Lendmark (consumer loan).

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