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 throwing up a new tool to place bets on securitized loans that are not directly attacked by the central bank, according to someone familiar with the matter will.
The Canyon Structured Credit Opportunity Fund has raised $ 170 million since it was launched this summer and is expected to double in the next three to four months, according to one knowledgeable person who refused to be named.
The Los Angeles-based company targets 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 the TALF program. These include some ABS tranches, secured loan obligations, and mortgage-backed securities for residential and commercial properties.
A Canyon representative declined to comment.
With interest rates expected to stay close to zero for the near future, investors have been looking for safer, higher-yielding alternatives to corporate bonds, and certain segments of structured debt are spot on. Federal pandemic relief programs have mainly focused on corporate bond markets, while leaving certain securitized sectors such as non-AAA CMBS and CLOs in the dark.
As a result, the rally in securitized debt has generally lagged that of corporate bond spreads over the past four months. This means that some structured bonds may still offer a higher relative return than similar or even lower rated corporate bonds and may be on the verge of a rally.
ABS, meanwhile, was one corner of the securitized market that benefited somewhat from federal stimulus programs like TALF. As such, it has seen much of the spread widening following the March sell-off, but market observers suggest there may still be pockets of relative value.
The new vehicle is not solely a pandemic recovery fund. Instead, Canyon aims to build a portfolio that is stable for many different types of economic and interest rate scenarios and that expects mid to high single-digit returns, according to the well-known person.
The selection is designed 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 that there is a possibility of increased growth and inflation.
The fund is targeting senior tranches of ABS for aircraft leasing that were stable even during the March sell-off and are not expected to suffer any loss even under conservative stressed scenarios, the noted person said. It also invests in BBO-rated and other mezzanine CLO slices, especially CLOs issued after Covid and put together by disciplined managers. Canyon itself is a CLO manager who issues its own transactions.
Canyon is more cautious about the CMBS market, which has been hardest hit by lockdowns preventing people from visiting malls or staying in hotels. However, the fund will invest in a limited number of secure CMBS transactions, but will make up a smaller portion of the vehicle.
In March 2019, Friedman told Bloomberg News that the company had placed more than $ 1 billion on low-valued, retail-intensive CMBS debt through the CMBX derivatives market. However, it is unclear whether the company has since left his positions.
The new securitized fund will also invest in RMBS agencies, including Ginnie Mae securities, as well as a small amount of previous non-agency mortgage bonds and debt securities backed by fix-and-flip mortgages. However, it generally shies away from ABS for consumers, especially unsecured consumer loans.
Canyon has another fund, the River Canyon Total Return Bond Fund, which was launched in December 2014 and is more than 70% dedicated to securitized loans. It has returned almost 3% since the start of the year. However, the new Canyon Structured Credit Opportunity Fund is 100% securitized debt and has a slightly longer lock-up period than River Canyon.
Relative value: Best structured product return
Bank of America Corp. researchers Estimate the highest expected excess excess return on CMBS-BBB bonds, credit risk transfer RMBS B1 and B2 tranches, CLO-BBs, legacy RMBS, esoteric ABS and UMBS-3 agency RMB are in Im September, the relative outperformance is expected to continue, according to analysts in a research report. On the basis of price spreads for new issues, the BofA prefers the auto leasing ABS for private customers over ABS for car loans and the senior tranche of ABS for car loans with subprime over ABS
Quotable
"What you have in commercial real estate now is a very unstable environment and people want to take advantage of it," said Scott Tross, partner at Herrick Feinstein LLP and co-chair of the firm's real estate litigation division. Tross represents many special servicers. “The commercial real estate market is notoriously cyclical. What is happening is real estate is being taken over by property owners who are less well capitalized and they end up in the hands of people who are better capitalized. From my point of view, this is not a bad development at all. I see that positively. Real estate ends up in the hands of people who can take care of them. "
What's next
ABS deals queued for next week include deals from Hyundai Capital America (Prime Auto), GM Financial (auto floor plan), Business Jet Securities (aircraft ABS), Santander Consumer USA (Prime Auto Lease), and Lendmark (Consumer Loan).
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