TSL Express Daily News

‘Winners and losers’ dynamic will be a theme this year

Will be first time in 20 years with ‘real’ credit cycle

Sycamore Tree Capital Partners CEO Mark Okada discusses his firm’s credit market investment strategy on “Bloomberg Markets.”Source: Bloomberg

High-quality securitized credit is a good bet as the economy teeters on the edge of a recession that will test weaker borrowers, according to Sycamore Tree Capital Partners LP.

“The year we’re going into is going to be this dynamic of winners and losers and picking your spots within the space,” said Mark Okada, Sycamore Tree’s chief executive officer in a Thursday interview on Bloomberg TV. “Quality yield right now is quite a great place to be.”

High-rated collateralized loan obligations, which buy leveraged loans to package into bonds, are among investments poised to perform well, he said. CLOs are largely owned by banks, which are required by regulators to ensure they’re backed by plenty of capital.

“There’s a durable arbitrage built into AAA CLOs. There’s a regulatory arbitrage,” he said. “You’re floating rate, you’re AAA. I’m pounding the table on that trade.”

Other high-rated securitized debt also looks attractive, he said.

“There are parts of the mortgage market and the securitization markets where the AAA tranches are looking very very cheap, and they’re almost dislocated as far as we’re concerned,” he said.

As interest rates rise amid the Federal Reserve’s efforts to tamp down persistent inflation, an era of easy borrowing is ending, which means that weaker companies will be under pressure this year. It’ll be the first time in about 20 years that markets have had to endure a “real” credit cycle, where fundamentals don’t match what companies’ balance sheets are set up for, Okada said, adding that the workout period will last about two years.

That means stay away from CCC rated investments as well as companies that have poor balance sheets and assets, he said.

“It’s going to be this long slog like we had in 1999 and 2001 where we’re working through a lot of this,” Okada said. “It’s going to be choppy for a couple years.”