Martin Foden, Head of Sterling Credit Research at Royal London Asset Management, explores the inefficiencies, risks, and opportunities that elude many investors in the secured credit market.
Royal London Asset Management's journey through secured credit investment is neatly framed by our evolution. We have been investing in secured corporate bonds for over 30 years across a wide range of asset rich sectors including infrastructure, social housing, investment trusts and commercial real estate - meaning an extremely granular range of issuers.
From this heritage, following the Global Financial Crisis (GFC), we extended our reach into the securitisation market by investing selectively across residential mortgage backed securities (RMBS), commercial mortgage backed securities (CMBS) and other asset backed securities (ABS). In the broadest of terms secured credit represents a welcomingly diverse set of economic exposures with one critical commonality - a charge over assets.
Benefits of security, and the research hurdle
Security is a key credit enhancement, providing tangible backing to enhance bond recovery should a company default. However, its true value is more nuanced. By investing in bonds with the right type of security, both in terms of legal enforceability and appropriateness of collateral, dovetailing with protective covenants, such as early triggers that require issuers to supplement collateral pools as values fall, we can inject more dynamic protection into our credit portfolios. In an increasingly uncertain world, in an asset class with asymmetric risk and return profiles, the enhanced visibility and control from secured lending is hugely beneficial.
This post is funded by Royal London Asset Management
This is a financial promotion and is not investment advice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.