Justin Driscoll, senior managing director at BSAM, said he hopes to move that number closer to 50-50. "We like the CLO space, but we think the loan asset class is fairly attractive for a number of types of other investors. For instance, institutional investors looking to have a strategy, which can help them protect against the rising interest rate environment while earning a credit spread utilizing a defensive credit strategy."
Driscoll started out at venture capital firm Oxford Partners, and after a stint at Columbia Business School, worked at Manufacturer's Hanover through the Chemical Bank merger focusing on leveraged buyout loans in the late 1980s and early 1990s. After moving to Crescent Capital he stayed on after the acquisition by Trust Company of the West before joining BSAM five years ago. In 2001 the group launched its first CLO Grayston CLO 2001-01.
At TCW he worked with Jonathan Berg, who is now an associate director at BSAM. Other members of the team include, Niall Rosenzweig, managing director, Anthony Stark, v.p. and Chris Smith, associate, who joined last year.
The loan group attracts capital through its fixed-income department from smaller institutions both in a commingled format as well as in a separate account basis, which in an unlevered focus could include high-net worth individuals and/or institutions and family offices. BSAM as an institution has more than $30 billion in assets under management.
Driscoll believes alternative investors, who have gained exposure to this space through hedge fund allocations, will find value in having a loan manager managing money for them in the same format using total rate of return swaps on both a separate account basis as well as a commingled account basis.
Going forward, he said the team will stick with what he believes it does best, analyzing credit and being prudent about taking on risk. "We do believe that over the next credit cycle as our par business matures, there will be opportunities away from the par business in stressed and distressed areas and that will be a natural extension of our credit capabilities and obviously will be a function of the credit cycle as well," he said.
One strategy is to shy away from second-lien loans. "We are not a significant buyer of second liens for two reasons," he said. Driscoll explained that most second lien issuances have occurred in small sizes, causing concern about liquidity over the long term within those positions. "We think that as the credit cycle turns, the second lien space, particularly some of the smaller issues, are going to be very interesting alternatives for distressed buyers because you are going to be able to control an issue with very little money," he said. The second issue is the leverage second liens are piling onto a company, much more than traditional lenders may be comfortable with.
The group's style is defensive. It looks at individual businesses and credits and is recovery driven rather than yield driven. Credit selection and tight monitoring allows the group to stay in front of bankruptcy events or default events, he explained. "I learned a long time ago that you cannot fight the market when spreads are tightening," Driscoll said. "They are tightening and there's not a lot you can do about it. But what you can do is protect yourself against the downside by conducting thorough credit analysis. The beauty of the loan space is that over time, when spreads widen because you have rapid repayment rates, your spread will ultimately rise with the market. Success is ultimately driven by loss rates, or lack thereof."