Astra Asset Management has an award-winning ten-year track record of generating lowly correlated double digit returns from a repeatable process. Many investors – including the founders themselves – have entrusted their capital to the independently owned firm from the start in 2012. Engagement, activism and intricate knowledge of structures have been perennially important drivers of alpha in catalyst-driven situations, while more tactical trades have capitalized on intermittent dislocations in sub-sectors of structured credit.
In 2023 Astra is taking advantage of the biggest dislocation in structured credit since the GFC and is expected to launch a new vehicle to deploy more capital into special opportunities in private asset-based lending. Astra has augmented its team, assembling one of the broadest, most senior and seasoned teams in structured credit and ABL, including a private debt and special situations team with capability to do private securitisations.
We see an unpredictable default environment which is very different from either the GFC or the European sovereign crisis.
Albertus Rigter, Astra Asset Management
Deeper discounts and less leverage
Several of the investment team at Astra previously worked together at Deutsche Bank’s principal finance unit, Winchester Capital, which managed in aggregate over USD 20 billion. Astra seeks deeper discounts and arbitrages than a typical proprietary trading desk, partly because it prefers trades that do not need financial leverage to make double digit returns, though there can be some structural or embedded leverage. “We aim for a substantial return in any market environment with low volatility and correlation and relatively short duration instruments of two to four years on average,” says co-founder and CIO, Anish Mathur. These are cash on cash returns: most of the performance in Astra Specialist Credit Investments Limited (ASCIL) has come from realization events. The bread-and-butter trades, year in, year out, focus on engagement, activism and catalysts, which mainly generate alpha. Co-founder, Christian Adler, estimates that, “two thirds of returns, and 80% of alpha, have come from catalyst trades”.
Photo taken in front of the Guildhall London where Astra celebrated its 10 year anniversary. (L-R): Albertus Rigter, Mark Murray, Sharad Vohra, Christian Adler, Shikha Gupta, Anish Mathur, Michael Holdom and Ken Brougher.
Scrutinising collateral, structures and triggers
Astra uses active management and activism mainly in mortgage-backed securities, which is overall larger than the equity market. Though, Astra is foraging for value in less commonly trod segments. “We seek the best risk/reward in non-agency US mortgages and CDS, and non-agency European mortgages. We do collateral valuation analysis on underlying properties as well as the more difficult deep structural analysis of legal structures and covenants including hidden structural features,” says Mathur.
“Structural breaks are especially sought after to find convexity from instruments that have suffered the most and may benefit from most upside,” says Adler. A proprietary database of RMBS, CMBS, and CLOs has been an important source of edge, screening and flagging up key triggers and issues. “We can anticipate what deals may likely be underwater, whether a special servicer is under pressure to take action and so on,” he points out.
These unusual features are springing into action more often now. “After a six- or seven-year bull market, volatility and potential changes in credit ratings can set off all sorts of triggers and mechanisms that impact particular tranches or structures and their investor bases. We pay close attention to how the investor base differs in various parts of the structure,” says Albertus Rigter, who sits in Zurich and joined in 2019 from LGT Capital Partners.
90c
“AAA tranches can sometimes trade at low 90 cents on the dollar, leaving a very low probability of losing capital,” says Christian Adler.
Constructive and collaborative engagement and activism
Activism can sometimes seem aggressive and adversarial in equities, but in structured credit constructive engagement and activism to enforce legal rights in documents is a collaborative and methodical process: “We work with all stakeholders including borrowers, special servicers, trustees and asset managers to ensure that debt is repaid through securitization vehicles. We sometimes hold larger positions to obtain voting and enforcement rights, and may appoint advisers. The process can take 9-12 months,” says Mathur.
Astra has sat on restructuring committees in the public space: “We worked on a securitization that was financially troubled even though it should have been bankruptcy remote. We worked out a solution to restructure the vehicle, liquidate and unwind it in an orderly fashion. We will get involved as an activist investor where we can add value,” says Adler. The founders of the firm are still happy to roll up their sleeves and get stuck into the nitty gritty of credit work.
Portfolio manager Shikha Gupta, who featured in The Hedge Fund Journal’s 50 Leading Women in Hedge Funds 2022 report published in association with EY, has led activist efforts on structured credit vehicles. She had managed over USD 10 billion at Deutsche and now sits on Astra’s management committee and is a director of its UK company.
The private debt and special situations team is led by Ken Brougher who was head of Deutsche Bank’s multi-asset structured notes platform with USD 40 billion in issuance. “We not only analyse collateral but can also do in-house structuring where many team members have experience,” says Mathur. Sharad Vohra, also in the private debt and special situations team, previously ran the EMEA CLO Trading and Global CLO structuring team at Goldman Sachs.
The team of credit analysts have come to Astra from a variety of backgrounds ranging from distressed debt and insolvencies at KPMG to structured finance at Société Générale and Lehman Brothers.
We took the view that Covid would not repeat the GFC, and that central bank support would need to be dispersed through banking conduits, and profited from a strong recovery.
Anish Mathur, co-founder and CIO, Astra Asset Management
Tactical trades exploiting dislocations
Astra is concentrated on alpha but will make tactical and somewhat more beta-oriented wagers after big dislocations. These trades drill down into such specialized areas and structures that the beta should be viewed as a fairly exotic variety rather than broad credit market beta. “After the GFC, synthetic CDOs and RMBS were completely mispriced and had not recovered even by 2012-2013. By 2014 commercial real estate backed paper in both the US and Europe were most interesting. In 2016 the focus shifted to ABS CDOs, corporate CDOs, and CLO equity in Europe. In 2018-2019 the book rotated back to some RMBS which were discounting zero interest rates for a decade, as well as adding specialty finance,” recalls Mathur.
At the beginning of the Covid-19 pandemic, Astra held its largest ever cash position at 34% and proceeded cautiously. “As the crisis hit, we did not try to time the market but built-up risk over a period of time, while maintaining some dry powder. We were investing with a one- or two-year time frame but saw one of the fastest recoveries of any fund during 2020,” points out Mathur. Trust preferred CDOs were of special interest as capital was exiting the space and pushing up yields. “We took the view that Covid would not repeat the GFC, and that central bank support would need to be dispersed through banking conduits, and profited from a strong recovery, taking some profits on the TRUPS position and holding some,” says Mathur. Another trade example during Covid was investment grade CLO tranches: backed by secured loans to European corporates with credit enhancement and subordination from junior tranches below were offering a double-digit recovery in a short, 6-8 months’ time frame.
More recently in 2022, Tier 1 bank capital, including contingent convertibles, has been especially hard hit by inflation and rate rises. But rather than taking on broad exposure to the asset class, Astra has pinpointed specific structures that are likely to be called, including a Swiss bank Tier 1 instrument called in late 2022. “The price of the instrument did not reflect call probability, but our deeper analysis showed it was uneconomic for the bank to keep the paper alive,” says Mathur.
The tactical trades have rotated around different sub-asset classes and sub-sectors because every crisis is different. “The current environment in Europe cannot be easily compared with the European sovereign crisis of 2011-2013 as that was still partly a hangover from the GFC. There was zero primary issuance in the securitization space,” explains Mathur.
The latest dislocation is partly related to the UK’s “Kami-Kwazi” gilt crash and 2022 third quarter end. Forced selling of high-quality collateral by pension funds and dealers provided some good entry points for Astra to deploy its dry powder. In late 2022, yield pickups on structured credit are the highest since the GFC, with BBB-rated tranches paying as much as 600-800 basis points more than comparable bonds and compelling value seen in the investment grade slices. “AAA tranches can sometimes trade at low 90 cents on the dollar, leaving a very low probability of losing capital. Single A spreads now exceed the long-term average for BBB spreads. Some investment grade tranches spreads widened to over 600. There is an imbalance between supply and demand with fewer players active on the investor side,” says Adler. Liquidity is however better than it was in the GFC, and Astra would be surprised if this level of arbitrage lasted more than a year.
(L-R): Shikha Gupta, Christian Adler, Anish Mathur and Michael Holdom
Macro outlook and macro hedging
Macro provides important context for idea generation and trade selection, but Astra are more likely to hedge than directly bet on macro factors. Though some positions could have potential multi-month event catalysts such as tender offers, Astra is generally taking a two-to-three-year view and would not take a multi-month view on macro outcomes.
In 2019, Astra started to fear more inflation, based on structural forces such as trade barriers, deglobalization and low unemployment, even before Covid complicated the situation, but macro views are not the primary driver. Astra finds investments with a large enough margin of comfort and safety to render the macro secondary: “Macro is the blunt edge of a very big sword,” says Mathur.
Astra certainly expects more corporate defaults and Mathur points out that, “the UK currently has more insolvencies than ever, mainly affecting smaller companies within SMEs. In addition, recovery rates have been coming down for years due to cov-lite structures”. Rigter adds: “We see an unpredictable default environment which is very different from either the GFC or the European sovereign crisis. This is more of a corporate crisis with inflation, rising input costs and massively pressured margins while QT also takes liquidity out of the financial markets and makes refinancing harder. We also think there could even be more overspill from the pension funds’ LDI crisis”.
This backdrop is disturbing for long only or long biased investors tied to broad benchmark exposures, but Astra is confident about homing in on sweet spots in structures such as AA or A rated tranches of structured credit vehicles trading at significant discounts. “Investment grade CLO tranches have significant resistance against default. For instance, and A rated CLO tranche can withstand 20% constant default rate which is almost double of the peak default rate we experience in the GFC. Therefore, we believe it is possible to find compelling investments such as AA or A rated tranches of structured credit vehicles trading at significant discounts. In contrast CLO equity has a lot of idiosyncratic risk,” says Adler.
Macro views might feed into selection amongst sectors such as consumer, corporate and commercial, and could influence interest rate hedging and other hedges. Astra looks to limit exposure to macro factors where possible. “Credit risk however is usually not hedged since that is the risk we are getting paid to take. In addition, if idiosyncratic events and catalysts rather than market returns are expected to drive returns, then there may not be any appropriate hedge and available hedges could run into mismatch problems. A close proxy hedge might sometimes be used,” says Mathur.
These sorts of position hedges are separate from tail risk hedges for the overall portfolio, and alpha shorts, which are not always present. Alpha shorts have included European corporate credit indices and tranches and are sometimes constructed on a relative value basis to reduce negative carry.
Private Lending Launch: Astra Private Credit Opportunities (APCO)
The flagship ASCIL strategy, which offers quarterly liquidity, has averaged 12% annualised returns over ten years (as of December 2022) whereas separately managed accounts set up for specific clients have averaged an IRR of 19.56%. This partly reflects a lower level of cash drag since the main fund is normally sitting on some cash. The longer-term vehicles also have a greater ability to earn illiquidity premia, where Astra’s first step into private debt was in response to yield compression on the public side.
In 2023 the climate is opportune to roll out a dedicated private debt strategy. This is partly because banks are approving fewer loans and because companies have freedom to offer senior lenders security against unencumbered assets precisely because covenants were loosened so far during the very long credit bull market that was arguably artificially extended by the Covid policy response. Astra can now structure deals with healthy over-collateralisation, perfected security, reduced legal risk and scope to swiftly resolve issues, as well as sometimes garnering upside optionality through equity participation.
APCO’s sweet spot ticket size is USD 20 million to 100 million, where they are not competing with big banks or bigger funds for larger loans, nor with regional banks, family offices and private banks for smaller deals.
Gathering multiple premia
The balance amongst complexity, sourcing, structuring, speed and illiquidity premia varies with the type of asset. Mathur estimates that complexity premia are the largest, followed by illiquidity premia, but in some situations time is of the essence and Astra can compete on speed. “Private securitisations have sometimes been completed within weeks, but it really depends on the nuances of a deal. It can be more time consuming to value collateral and assess structures in multiple countries,” says Mathur.
Originations have included a deal in the Netherlands backed by nine office and retail properties, which took several months to structure.
In a lower yield climate it can sometimes make sense to sell the senior part of deals to create a higher yield on the residual, though in late 2023 owning an entire unitranche loan can generate excellent returns.
Astra sees asset backed lending in 2023 occupying the risk landscape which plays directly into their structuring acumen: “Yields may still be too tight for direct lenders, but could be attractive relative to MBS and ABS with potential for structuring capability to create cheaper borrowing and risk mitigation,” points out Mathur.
Non-sponsored
Astra observe that private equity sponsored lending deals tend to have more leverage and weaker covenants, where the term sheet can be subject to a “Dutch auction”. Whereas the highest bidder wins in a normal auction, the lowest bidder in terms of covenants can become the winning lender in these situations. Weak covenants then open windows to opportunistic and creditor-unfriendly behaviour from private equity sponsors.
Hard collateral
Astra’s collateral of preference is comprised mainly of hard assets such as real estate, plant and equipment. This approach is endorsed by their edge in analysing structures underlying collateral, focus on LTV and recovery value on the asset.
Receivables can sometimes be part of a package of collateral, but Astra steer away from supply chain/working capital finance/factoring, which they view as relatively crowded.
Some deals could involve social housing, which is sought after by some ESG and impact investors. Astra is attracted to it by the risk/reward of the credit investment thesis: there is structural undersupply in many European countries, including the UK and Ireland, and the credit risk could be akin to a 20-year contract with a local government entity.
Equity optionality
Stressed situations can give rise to potential for restructuring and workouts, though Astra does not expect borrowers to be distressed at the outset of a transaction. Some deals involve some form of debt with a component of equity, with Astra taking an element of private equity participation via warrants, mezzanine tranches or recapitalisations, with much higher overall return targets compared with the regular ABL deals. “Exit routes for private equity exposure can include IPOs, acquisition finance or selling warrants back to management,” says Mathur.
Secondary markets
APCO has a flexible mandate that can avail of secondary markets but as of late 2022 the primary opportunities are envisaged in primary origination. Secondary market opportunities from banks or other direct or asset-based lenders selling non-performing loans at a discount may eventually emerge but could take some more time because they will first tend to try and restructure loans.
Astra certainly has the capacity and team to manage larger assets. But there is no target for asset growth (besides estimated capacity of USD 1 billion in ASCIL) because performance is the priority. “We want to be the best not the biggest. We take pride in analysis, and quality of returns, and do not have any external owners pushing us to raise assets,” says Mathur.
Astra is increasingly a contender for institutional mandates where competing asset managers are much larger and is attracting growing attention from leading investment consultants who advise some of the world’s largest asset owners.
The balance amongst complexity, sourcing, structuring, speed and illiquidity premia varies with the type of asset. Mathur estimates that complexity premia are the largest, followed by illiquidity premia, but in some situations time is of the essence and Astra can compete on speed. “Private securitisations have sometimes been completed within weeks, but it really depends on the nuances of a deal. It can be more time consuming to value collateral and assess structures in multiple countries,” says Mathur.
Astra observe that private equity sponsored lending deals tend to have more leverage and weaker covenants, where the term sheet can be subject to a “Dutch auction”. Whereas the highest bidder wins in a normal auction, the lowest bidder in terms of covenants can become the winning lender in these situations. Weak covenants then open windows to opportunistic and creditor-unfriendly behaviour from private equity sponsors.
Astra’s collateral of preference is comprised mainly of hard assets such as real estate, plant and equipment. This approach is endorsed by their edge in analysing structures underlying collateral, focus on LTV and recovery value on the asset.
Stressed situations can give rise to potential for restructuring and workouts, though Astra does not expect borrowers to be distressed at the outset of a transaction. Some deals involve some form of debt with a component of equity, with Astra taking an element of private equity participation via warrants, mezzanine tranches or recapitalisations, with much higher overall return targets compared with the regular ABL deals. “Exit routes for private equity exposure can include IPOs, acquisition finance or selling warrants back to management,” says Mathur.
APCO has a flexible mandate that can avail of secondary markets but as of late 2022 the primary opportunities are envisaged in primary origination. Secondary market opportunities from banks or other direct or asset-based lenders selling non-performing loans at a discount may eventually emerge but could take some more time because they will first tend to try and restructure loans.
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