The residential mortgage sector has been a core focus for the company since it was founded in 2005, says Tim Geraghty, Waterfall’s head of capital markets. The firm brought three RMBS deals to market in 2020 following the pandemic outbreak, but it was the Cascade Funding Mortgage Trust (CFMT) 2020-AB1 that was voted the stand-out deal of the year.
Reverse mortgage deals are relatively rare, but have become a specialty for Waterfall, which has issued 12 reverse mortgage securitizations since 2013 with over $5.4bn of collateral balance. The $285.8m CFMT 2020-AB1, with Nomura as sole structuring agent and bookrunner, stood out in several ways.
“The reverse mortgage sector was as resilient, or even more resilient, than broader structured markets throughout the pandemic, driven in part by the fact that reverse mortgage borrowers typically are not required to make principal and interest payments,” says Geraghty. “This deal was backed by what we believe are high quality assets, met with solid investor demand, and was syndicated to over 10 accounts.” The deal was also the first to consist entirely of active assets, and only the second securitization to include active assets, a departure from a market that has consisted largely of NPLs and inactive assets.
A third feature that caught the market’s eye was the 24-month reinvestment period – a first for a transaction backed by home equity conversion mortgages which are reverse mortgages that are insured by the Federal Housing Administration. This allows Waterfall to fund additional eligible collateral for two years, investing in similar assets as repayments occur. The investors, meanwhile, may benefit from a more stable duration profile. “Some of the inactive deals prepay really quickly and so there’s reinvestment risk,” says Geraghty. “Balancing the reinvestment period for issuer and investors was mutually beneficial.”
“Waterfall continues to see new ABS investors entering the reverse mortgage market,” he adds, “and capital solutions like the CFMT deal will help build a more liquid market that has the potential to benefit issuers, investors, and borrowers.”
Waterfall was pleased with its performance throughout a highly disruptive 2020. This was a challenging year for most market participants, even for hedge fund managers, who tend to be more nimble operators than most. “We came through to the other side stronger and with higher AUM,” Geraghty says. “These were really unprecedented market conditions and we manage many credit intensive instruments. We’ve been happy with our returns and our committed investor base.”
Waterfall has tripled its AUM from approximately $3bn in 2013 to approximately $9.5bn. The firm’s investment team comprises 64 full-time staff in New York and London, covering a range of structured credit across bonds, loans, and private equity. Few firms could claim to be active across the same breadth of sectors and products. Waterfall is active in over 40 different ABS sectors across the US and Europe.
“We’re sector rotational around relative value and in recent years the biggest focus has been on RMBS, CMBS, and esoteric ABS,” says Geraghty. “But we look at the whole landscape of the asset class and look to participate in a variety of ways.”
The firm is proud of its track record over its 16 years and strives to be in the top decile of alternative investment managers. There’s a particular focus on the Sharpe ratio, which has allowed Waterfall to offer investors compelling risk-adjusted returns.
Geraghty attributes part of Waterfall’s competitive edge to strong relationships it has built with long term investors. That has provided a deep, stable base of capital that not every alternative investment manager can boast it has. But he also points to the culture created by founders Tom Capasse and Jack Ross, veterans of many credit cycles over many decades in the capital markets.
“They instilled an entrepreneurial and innovative culture at the firm,” says Geraghty. “Jack and Tom have built a team with deep expertise and a broad platform that’s allowed us to pursue interesting trades in many different sectors in both the US and Europe. We’re nimble, we’re looking to grow and those have been the real positives.”GC