APS Clearing, an affiliate of Austin, Texas-based APS Financial Corp., is moving into the trading of bank debt and trade claims as hedge fund demand continues to escalate. Matthew Hamilton, who was previously a high-yield trader and legal analyst at APS, is spearheading the effort that will primarily focus on distressed middle-market names but will also cover some par names.
"It's a burgeoning market," said Hamilton, who explained that APS' current base of customers comprises hedge funds and mutual funds. APS serves them in the bond and equity markets but sees a clamoring for more outlets for liquidity in syndicated loans and trade claims. Moving into bank debt and trade claims is seen as an extension of APS' high-yield bond business, so an investor can buy across the capital structure. APS will source from this base of investors, he noted, adding that the shop will not run a proprietary operation competing against its clients.
Hamilton stated that the market environment right now is rich with only a low proportion of credits trading at distressed levels. But APS is positioning itself for the next default cycle. Additionally, investors are increasingly shifting away from bonds to the floating-rate asset class. Not only does this offer upside as rates rise, but potential recoveries are higher, he said. Another factor that influenced APS' timing into this market is the increased efficiency in the clearing and settlement process, especially with the new Loan Syndications and Trading Association documents, Hamilton said. APS will handle all clearing and settlement in-house.
APS' research has primarily been around the middle-market with issuance sizes of less than $1 billion. "That will be our niche on the corporate side," said Hamilton. The firm will operate on the private side, but will generally not take material non-public information, so as not to be restricted.