Specialty Finance: Seize Today’s Compelling Entry Point

Text on screen: PIMCO

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Text on screen: Preeyam Gandhi, Alternative Credit and Private Strategies

Gandhi: Well, the asset class has certainly come into the spotlight, Christian and Kris, I have to ask why now? Why should investors be excited about investing in specialty finance?

Text on screen: Christian Stracke, PIMCO President and Global Head of Credit Research

Stracke: Well Preeyam, it is an exciting time right now for, it's a confluence of a number of different reasons. I would highlight two important ones.

One is higher rates and what it's doing to banks.

Text on screen: TITLE – Why now for specialty finance?, BULLETS – Continued bank retrenchment due to increase in rates and regulatory pressures, Compelling entry point for investors to diversify away from corporate lending, Higher rates and capital markets volatility has increased pressure felt by non-bank originators 

So, banks, the days of banks being able to depend on zero cost of deposits, those are over and especially, a second tier regional bank that is less credit worthy really does need to worry about its access to deposits and so it's changing its business model away from originating these loans to hold in its balance sheet to find ways to sell them out to the PIMCOs of the world.

So, that's the one thing that rates is doing.

The other thing that rates is doing is it's really threatening the direct lending corporate private credit market, where those are floating rate loans on levered borrowers that are very exposed to higher interest rates and the additional interest costs that they're incurring and so now is the time really to diversify away from that area, especially if you have legacy claims to look at more of other asset classes that maybe  less interest sensitive.

Kraus: I would add.  I think, you know, where we're at today, I think the consumer overall is in very good shape. The starting conditions are much better.

Text on screen: Kristofer Kraus, Portfolio Manager

There's an opportunity, given the volatility that Christian just referred to from the rate side to create some attractive entry points.  We're seeing too less competition from where we were several years ago.

I think the rate volatility has reshaped the landscape, not only in terms of what's happened with the regional banks, but also in terms of the non-bank originators that were, you know, a large player in these markets a couple years ago. So, we're finding opportunities as I said, we like where the consumer is at from a health perspective going forward and

Images on screen: PIMCO trade floor

we're able to go up in credit and so we think it's a very, very target rich environment right now.

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