Stewart: It's going to be fun. And we're also joined by Paul Carroll, who's Private Structured Credit Portfolio Manager also at MetLife Investment Management. Paul, thanks for taking the time and thanks for being on with us today.

Paul: Hey, Stewart, great to be here today. It's a pleasure to be on your show.

Stewart: We're thrilled. We're at around 270 episodes and people have been saying to me lately, the quality of the guests that you have and the amount of information in these podcasts is terrific. So I mean, we're here to educate. We want to talk to the insurance investment professionals. We just actually trademarked the phrase, “Home of the World's Smartest Money,” which is I think indicative of the insurance investment professionals that are listening to our show.

And so before we get going too far, I'd like to know a little bit more about each of you. And if you would please tell us where you grew up, what was your first job, not the fancy one.

Poorvi: Yes, I can start. I actually grew up in India, and I moved here about 25 years ago. My first job was at a tech startup focused on digital marketing solutions, and I spent about a year there before going to business school. Post-MBA, I joined MetLife Structure Finance team. I've been with MetLife in Structure Finance for almost 18 years now, and have had the opportunity to work across multiple asset classes within public structure finance, and made the move to the private side about five years ago now.

Stewart: Wow, that's very good timing. That's great. So how about you Paul? Where did you grow up and what was your first job, not the fancy one?

Paul: I grew up in, born and raised in Boston, Massachusetts, Boston sports fan. So it's been a good run over the past decade or so. But we've kind of gone into some dark days here from a sports perspective in Boston sports.

Did a number of different jobs in high school and college. But interestingly, my fascinating, really amazing role was my first role after college, I decided to move abroad, move overseas. And so I spent four years living in Vietnam after undergrad, two of which were in a language program, so a full-time language program, followed by another two years working for the UK Prudential in Vietnam, which was focused on bringing life insurance into that market and into a developing economy.

So it really gave me my first introduction to the insurance business, both the insurance side as well as the investment side of it. And that's served me well through my career. And as where I am today, I've been with MetLife Investment Management for about 10 years, about half of which were on the public structured finance group, and then the most recent 5 years have been in the private asset backs team.

Stewart: It's amazing to me because I remember what a knucklehead I was when I first got out of college. I mean, you couldn't be more clueless than I was. And I can't imagine going to Vietnam. I was lucky I could find my way home. And that time of your life, to take on that kind of a challenge, I think that's a little inspiring. It is.

So I've kind of gone in a couple circles here. So I want to get down to the topic at hand, which is private structured credit. And it's been around for a minute, what's now known as ABF. We did a recent survey, 70% of the people wanted that to be the topic of our next event. But this is a very familiar asset class, which I've always known as ABS. But talk to us a little bit about the private structured credit market, what it is, what it isn't, and what sets it apart from other credit instruments that insurers might be investing in.

Paul: Sure. Thanks for the question. And yes, so private structured credit, it is, as you mentioned, it's also referred to as ABF, asset-based finance, and it generally consists of a number of sectors that are backed by a cash flowing collateral. You may have consumer credit. There are typically several major core sectors that constitute the ABF space. You have consumer credit, commercial credit, residential credit, and then also fund finances are another example of major sectors within the broad ABF space.

It's distinct from direct lending and other types of private credit, which historically or generally speaking are backed by corporate types of debt. Whereas ABF is backed by different pools of collateral in those sectors that I just mentioned. Typically, the collateral is isolated in a bankruptcy remote SPV, and as a result, it's not connected to the financial health or financial risks of the deal sponsor.

Now, the market's been developing, like you said, over the past few years, and there's a lot of interest from insurance companies because it acts, one, as the pricing offers good spread premiums, so good pickup in terms of yield enhancement versus other competing asset sectors. And then there's also a diversification component too. So it's offering access to certain sectors, certain collateral types that aren't necessarily found in other available sectors, whether it be in the public market or in the direct lending space.

Stewart: I remember when I was early in my career and sometimes mid-career where somebody would use a term, I didn't understand what it meant and I was afraid to ask. So when you were talking about the collateral types, you mentioned consumer finance. In plain English, it's credit card receivables. It could be automobile receivables, which is the payments on loan, auto loans that are securitized. And there's other kinds of collateral like that, but not residential mortgages, not commercial mortgages on real estate. So there's a differentiation there.

I just kind of want to get the bigger crayons out for folks who are earlier in their career that are learning and might not know what some of those terms mean. Is there any other way that you can unpack what that collateral just in layperson's terms?

Paul: Yeah, absolutely Stewart, and it's a great point. Yeah, so within consumer credit, we will typically break down that area into a number of different sub-sectors. As you mentioned, auto loans are one example, credit card receivables are another. And then just a couple more common ones, student loans or consumer installment loans, are other examples of credit risk or credit that are related to the consumer.

Now, in the other sectors, just to provide a little bit of a breakdown or some examples of sub-sectors within the other areas, commercial ABS, commercial credit, you may see things like equipment receivables, equipment loans, data center, financing is another area that's really been prominent in recent years and continues to grow given the demand for data center capacity. Like you mentioned in the residential credit side, this is another area, there is a consumer element involved to it, but it also has the backing of the housing as well. So those are typically mortgage instruments that are in the residential credit space.

And then lastly, another area that's really been growing over the past few years is fund finance. And those are different types of financing arrangements to the private equity space with NAV loans being a very prominent example there.

Stewart: That's super helpful. And so Poorvi, when we talk about private ABS, what differentiates it from public ABS? I've had people tell me it's the same thing, different wrapper, but other people say that there are significant differences. From your perspective, what are the differentiators?

Poorvi: Yeah, no, that's a great question, Stewart. Structured finance, as we know, it is not a new asset class. It has existed for multiple decades now. Private structured credit is just an extension of structured finance where a lot of the asset classes, the structures may be similar to what we find in the structured finance space, but these deals are privately sourced, directly negotiated with the issuer. And because of that, we have greater control over the deal terms.

Now, to contrast that with public transactions, public transactions are typically broadly syndicated. The transaction structure, terms, they're fully baked by the time investors get to see those deals. There is a tighter turnaround time, and investors do not really have an opportunity to negotiate the deal terms.

The other trend we see on the public side is it's oftentimes difficult to get a sizable allocation. Let's say a deal is oversubscribed, an investor can get cut back substantially, and we saw that happen in 2024 when there was a very strong investor demand.

Whereas if you look at especially MIM’s private structured credit deals, they are typically originated on a bilateral or club basis. And what that means is that we are either the only investor in the deal or we are the lead investor, so we can dictate the size. And as I mentioned earlier, given that these are privately negotiated, we can build in customize covenants and investor protection.

We almost every time have an investor counsel on the deals, which is unlike what happens on the public side, so another set of eyes looking at the docs, helping us negotiate the deal terms. Given the private nature of the deals, we can get access to proprietary information, which also includes enhanced collateral performance data. And this is more than what we typically get on the public side. So what this means is that we have information and underwriting advantage, which is critical in not only finding the right opportunities, but also understanding what to avoid.

And I just want to end with giving one example of a recent transaction we originated. It was in the credit card ABS space where we were able to get a full allocation and negotiate not only tighter trigger levels, but also build in additional covenants that are not typical in structured finance transactions such as enhanced prepayment protections or covenants tied to the financial health of the borrower. And what this means is that it gives us a seat at the table earlier than a typical ABS investor would.

So again, just to summarize, with private ABS deals, we could have greater control over the deal terms and it helps  build in enhanced investor protection.

Stewart: And I don't want to put words in your mouth here, but this is a scale game. I mean, if you are a relatively small insurance company, it is difficult to get access to some of these deals and have that kind of negotiating power. That comes with scale. I don't want to say something that you don't agree with. So is that a fair assessment that your scale helps you?

Poorvi: Absolutely. And that is a very, very critical point in terms of being able to source opportunities in this asset class. Our bite size tends to be $50 million to $500 million plus. And being able to provide that size, being a single investor in the deal, being able to provide the full capital stack solution, all of that is very, very attractive to a borrower, and very critical in terms of us being able to source opportunities. So that was a great question, thank you.

Stewart: Yeah, absolutely. And at the end of the day, I mean, it's not like I'm not trying to toot your horn, it's just a statement of fact. You reference club deals, and you have to be a certain size to get in a club deal. Because if everybody was tiny, it wouldn't be a club deal anymore. So I just think it's an important point to know that in this particular market, size matters.

So Paul, I want to come back to you that the private structured credit market has grown significantly since the 2008 financial crisis, which has been some time ago. What is driving the growth? And can you talk a little bit about how regulatory shifts are impacting the opportunity for private structured credit for insurance companies in particular?

Paul: Those are great questions, Stewart. So there are a couple different factors that have really supported and pushed forward the growth in ABF since the GFC. And I'd like to break it down into a couple different aspects. And because every transaction you have effectively a borrower and a lender, so you have to kind of start with what are the benefits to each party, both sides of the table, in order to how it makes sense.

So just starting with the issuers or the borrowers here, there is a lot of flexibility in the private asset-backed space that accommodates certain objectives of the issuers. In the public market, predefined types of transactions are very rigid in nature and it doesn't really accomplish a lot of what issuers are looking to do.

So for example, in the private asset-backed side, we're able to work on transactions that have different collateral types. There could be different tenor objectives that the issuer or the borrower may have in mind. There could even be some certain components like a delayed draw feature. And even whole-loan sales are things that are able to be accomplished in the private asset-backed space, whereas they're very difficult to accomplish in the public market. So that's one area that facilitates the growth of private ABF.

Stewart: Let me ask you a quick question. Can you explain to me what a delayed draw, what that means?

Paul: So with a delayed draw facility, as the lender or as the investor in a transaction, we will typically commit a certain amount of capital on day one. Let's say just for example, it's a $100 million facility. Now, that capital will not be fully utilized or fully drawn on the first day. There is an availability period, which may be, say, 3, 6, 9 or 12 months depending on the specific needs of the borrower, in which they will be effectively be able to tap that capital for the acquisition of assets, the financing of assets into that pool. And so a delayed draw gives that issuer more flexibility to draw funds as they need them over a given period of time.

Stewart: So when MIM discusses private structured credit, otherwise known as private ABF, so everybody knows we're talking about the same thing here, is it capital-efficient asset class that can offer higher spreads with the same ratings? Can you talk a little bit about that, how the risk align with insurers long-term objectives? And my experience is that ABS or ABF, whatever you want to call it, is typically a shorter duration asset than some of the very long, dated corporate liabilities that are typically owned by life insurers. So can you talk a little bit about the typical duration profile or is there a typical duration profile of this asset class as well?

Poorvi: Yeah, yeah, absolutely. So to answer the question about allocations or fit of this asset class for insurance portfolios, I would start by saying that ABF is certainly becoming a critical part of asset allocation for insurance companies, and it is for some of the reasons we discussed earlier. It's a combination of attractive yield opportunity for diversification. Paul discussed that we can diversify away from corporate credit into consumer, resi credit, fund finance. It's the structural protections that I mentioned earlier. So that makes it an attractive asset class for insurance portfolios.

Now, the key considerations for insurance investor tends to be yield, duration that you brought up, as well as liquidity, when it comes to asset allocation decisions. There's certainly a liquidity trade-off here versus public, and it is for the premium and the investor protection we get in the asset class.

What draws insurance investors to this asset class is that a large percentage of the opportunities that we see are IG-rated, and we believe we could  get a very attractive yield pickup over the public counterparts. So generally investors may access IG investments with 150 to 200 basis points of excess spread relative to public corporate.

And just to give you an idea, Stewart, about the quality of MIM's private structure credit portfolio. So we have over 90% of our portfolio that's rated single-A or higher. We have a weighted average origination spread of high 200, and we see that's very, very attractive for that credit profile.

We're currently seeing senior cash flows, single A/BBB rated opportunities in the low 200 to 300 basis points range. And that profile does get a lot of attention from asset allocators, especially with the significant spread compression that we saw in 2024 across all credit products. So that's a really important point to make in terms of the spread and the high-quality IG assets that we can source in this asset class.

Now, with respect to your question on duration, with this asset class, given the wide range of underlying sectors plus collateral types, we are able to source opportunities across a wide range of weighted average life or duration. Plus, given the private nature of these deals, we can customize structures and tenors to meet portfolio liabilities.

So we have some opportunities that are 7-to-10-year weighted average life, and there are some opportunities that are shorter duration, 3-to-5 years or also floaters. And the question is for insurance companies, obviously there is a demand for the longer duration products which we see in our asset class, but also the shorter duration products or floaters would be a good fit for front end liability. So we're able to source opportunities across the full spectrum, whether it be 2-year, 5-year, 10-year floaters and with the higher spread. So we believe that the combination of all of that makes it a very attractive fit for insurance portfolios.

Stewart: Paul, let's talk a little bit about risk considerations in private structured credit, and particularly credit risk and liquidity are certainly key concerns. How do you manage the risks of those two in particular, and anything else? It's also I think, probably worth talking about convexity risk, in what's the prepayment profile? It's interesting because what I recall from this is that unlike a home loan that when rates drop, people can refinance their house, it's not so easy to refinance your 2-year-old Nissan. So talk a little bit about that risk as well, please.

Paul: Sure. Maybe I'll just jump on that topic really quickly first, address that, and then we can move on to the credit and liquidity risk aspects of what we do.

But you're right that putting aside residential credit mortgages which do have a high degree of negative convexity, many of the other asset types that are in ABF generally have a lower negative convexity profile. So we see there's kind of an inherent mitigate built into just the way that the nature of the asset classes themselves, that they have lower prepay risk there.

But there's an additional overlay that we have in most of our transactions, is that we either look to build in non-call periods or make-whole protection as well as part of the negotiation process for our deals. And so that also does help protect us as investors in these transactions if their interest rate environment changes in a fundamental way, particularly if rates move lower, that we have may call protection in place to protect against those types of early prepayments.

Stewart: I love it when it's your turn because I get a chance to unpack terms, and one of them is can you just explain to our audience what a make-whole call is? What does that mean, that provision?

Paul: So typically a standard make-whole will have a reference to where treasury rates are plus a small spread. So typically you might see a treasury plus 50 basis point make-whole formula. And generally what that does is that will discount future interest payments that are lost because of an early prepayment or an early repayment of your bond. And it will calculate effectively a premium payment that will go to the investors if their bond is redeemed early. So it's effective compensation for an early repayment of your bond or your debt instruments.

Stewart: That's super helpful. And so Poorvi, with the growth in private credit, we've seen a rise in regulatory scrutiny, and I think that regulators have been particularly active of late on a variety of fronts. So what are the key regulatory initiatives that you have your eye on, and what are the potential impacts? And this for our listening audience, this is where the insurance asset management really comes into play. We actually trademarked Home of the World's Smartest Money, and it's not because everybody's crystal ball is better, it's because of considerations like this that other institutional investors types don't have to be concerned with.

Poorvi: Yeah, that's a very timely topic, Stewart. So we are very closely monitoring insurance regulations that would affect both private as well as ABF asset classes. And there are a number of initiatives, some of which are targeted to address potential capital arbitrage concerns. That's where a lot of these are stemming from.

The key initiatives, in our view, include implementation of model-based capital charges for structured finance bonds rather than relying on ratings assigned by credit rating agencies. CLOs are currently the focus for regulators, but it may expand into additional asset classes and potentially result in higher capital charge for some tranches. So it's very important to keep an eye on what's going on there.

Then there is ratings discretion where if the regulators disagree with the rating by three or more notches, ratings can be challenged or even overturned, again could have a meaningful impact on an investment.

Principle-based bond definition is another key initiative which essentially determines whether a bond qualifies as debt or not. So in our seat, we have been paying closer attention, working with industry groups and understanding these changes, and aiming to make sure that there are no unintended consequences.

Given our origination and structuring discipline, as well as high-quality investments, we're not overly concerned that these changes will meaningfully result in a way in which we invest or may result in any major financial impact. But the implementation of these changes could be a heavy lift for investors. And we did experience that firsthand with the rollout of principle-based bond definition, especially for structured finance, where the framework is much more involved given the wide range of asset classes and complex structures.

In 2024, Paul, myself, our accounting team, we put in a considerable amount of effort supporting our clients in meeting the reporting requirements, and those efforts will continue into this year. So there are a number of key regulations that are either implemented or to be rolled out, and it's very important to stay on top of those to avoid investments or sectors that could potentially get negatively impacted.

Stewart: Absolutely. Paul, now that we're here in 2025, can you summarize 2024's activity, the good, the bad, and the ugly? And tell us what did well, what didn't, and why.

Paul: Yeah, 2024, looking back on the year, we really found good opportunities across four key sectors. That would be fund finance, C-PACE, low income housing, and residential credit. Those are the four main areas that we found good opportunities across really, and it kind of breaks down into four dimensions. One is attractive credit profile. Two is attractive pricing, so there's a spread pickup, we're getting adequately paid for the risk that we're taking on. Three, as you mentioned earlier in the podcast, scalability. Is it something that can be scaled to a meaningful size that's meaningful for the portfolios? And the fourth component is fit for client portfolios. So within those four sectors, we identified a lot of great opportunities that satisfied all of those criteria.

Now, on the challenging side, it really comes down to coming back to consumer credit. And we've been underway consumer credit from a new origination standpoint, and it's not because of any credit concerns that we've had there, but it's really just come down to pricing. That sector has been very well bid both by the public side and by the private side. And as a result, there's so much competition for those assets that's really driven in compressed pricing. So we've been a little bit underweight that sector and we've been participating in certain opportunistically when we find the right opportunities, otherwise doing less in that area.

Stewart: That's extremely helpful and very informative. Thank you. Poorvi, for now for 2025, where are the opportunities and where are you cautious?

Poorvi: Yeah, so if we just quickly look back at 2024, we saw a few things. Record level of structured finance issuance met with equally strong investor demand. Credit fundamentals were stable. So the combination of the two meant spread compression, and that was not obviously unique to structured finance, we saw that across all credit products. Now, as we enter 2025, we expect that the tone continues to remain bullish, and the base case expectation is continuation of the themes we saw last year.

On the spread side, we don't expect meaningful tightening from here on, especially given what we already saw in 2024. So we think that spreads will likely move sideways. And then for all the reasons we discussed earlier, we expect further growth and acceptance of private market solution for ABS sectors, and increased allocation from investors who would be looking for higher yields and spread premium compared to what they can get on the public side.

We may see some potential noise as details come out regarding the new administration's policies. Changes involving tariffs, infrastructure spending, deregulation could have varying effects on ABS asset classes. So for example, if we do see rise in inflation, that could pressure consumers, especially the non-prime consumer segment. So that would be something that we'll be keeping an eye on.

Renewables could face some headwinds if tax credits are rolled back, and this in turn could have an impact on the demand for something like solar panels. Less demand means less supply on the ABS side. So we'll be watching for some of those details as they emerge.

And then finally, I would say on the MIM side, we continue to see a robust pipeline across a wide range of asset sectors from fund financing to consumer, resi credit. We certainly did not see any slowdown in December, and we're looking towards an equally busy Q-1.

And our focus will continue to be on opportunities where we have sourcing and underwriting edge, and where we can provide a bespoke solution to the borrower, whether it be through strategic partnerships or forward flow arrangements with loan originators, focusing on less crowded asset sectors, for example certain segments within fund finance or loan pool purchases in consumer sectors. Paul touched on that. It's an asset class where the relative value is otherwise challenging within the typical CUSIP format, but what are the other ways of sourcing investments within consumer? It could be through loan purchases. So those are some of the areas that we'll continue to focus on in 2025, and the pipeline does look very robust.

Stewart: That is super helpful. What a great education on private structured credit. I really appreciate you both being on. I've got a fun one for you on the way out the door. When we have two guests, we kind of just ask it like this. You can have lunch or dinner for four, the two of you, and then you each get to bring one guest, and the guest can be anyone from any period, alive or dead. So I'm going to give Poorvi a second to think and I'll ask Paul, who would you most like to have lunch with lunch or dinner, alive or dead?

Paul: Wow, Stewart, that's a great question. For me, I would say my favorite author is Charles Dickens. Every summer over the past, not quite 10 years, but pretty close to it, I will select one Charles Dickens novel, there are about 800 pages or so, and just immerse myself in that world for the summer. And the way that he creates his protagonists, the challenges that they face that they need to overcome, the humanity that you feel in his heart as he writes these, it's just tremendous, it's really amazing. So I would have to say, I would love to sit down with him and just hear about how he put together this thought, how we've used the world would be absolutely amazing.

Stewart: That's fantastic. And you're the first answer ever with protagonist in it, which is great. I love that. And how about you, Poorvi? Who would you have?

Poorvi: I will have to go with family. I would definitely love to have lunch with my dad who passed away a few years ago. Looking back, I regret not having enough opportunities to spend time with him after moving here. He has been a huge inspiration for me, and I would love the chance to see him and have lunch with him one more time. So that's what I would go with.

Stewart: That is very touching. Thank you so much. We've been joined today by Poorvi Dholakia and Paul Carroll of MetLife Investment Management. Thanks so much for being on with us today. We really appreciate it. It was a really terrific education, so thank you.

Poorvi: Thank you, Stewart. Glad to be on and spend time discussing ABS. Thanks.

Paul: Thanks Stewart, our pleasure.

Stewart: Our pleasure. So thanks for listening. If you have ideas for podcast, please shoot me a note at stewart@InsuranceAUM.com, please like us, rate us and review us on Apple Podcasts, Spotify, or wherever you're listening to, your favorite shows. My name is Stewart Foley. We'll see you next time on The InsuranceAUM.com podcast.

Disclosure

This podcast presents the authors’ opinions reflecting current market conditions. It has been prepared for informational and educational purposes only and should not be considered as investment advice or as a recommendation of any particular security, strategy or investment product. This article has been sponsored by and prepared in conjunction MetLife Investment Management, LLC (formerly, MetLife Investment Advisors, LLC), a U.S. Securities Exchange Commission-registered investment adviser. MetLife Investment Management, LLC is a subsidiary of MetLife, Inc. solely for informational purposes and does not constitute a recommendation regarding any investments or the provision of any investment advice, or constitute or form part of any advertisement of, offer for sale or subscription of, solicitation or invitation of any offer or recommendation to purchase or subscribe for any investments or investment advisory services. Subsequent developments may materially affect the information contained in this article. Affiliates of MIM may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned herein. This article may contain forward-looking statements, as well as predictions, projections and forecasts of the economy or economic trends of the markets, which are not necessarily indicative of the future. Any or all forward-looking statements may turn out to be wrong. All investments involve risks including the potential for loss of principal.