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Navigating Investment Risks and Deal Structures in a Volatile Market

The investment landscape is marked by abundant capital but is hindered by risk aversion and a limited supply of high-quality deals affecting liquidity. Investors face unique challenges with structured products due to complex deal structures and mixed credits, often requiring substantial due diligence. Issues such as late payments, rating downgrades, and a lack of clear processes complicate investments. As investors seek to match assets and liabilities, they must navigate early termination scenarios that could lead to reinvestment at lower rates while managing expectations effectively.

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Navigating Investment Risks and Deal Structures in a Volatile Market

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  1. INVESTMENT CAPITAL • Abundant supply but still risk averse • Long terms heighten risk • Limited supply of deals – affects liquidity • Fewer investors for structured product • Limited investor universe for unique contracts • Acquisition and contracting poorly understood

  2. DEAL STRUCTURE • Complex analysis • Structure • Mixed credits • Unique terms • Often “one-off” • Often lacking “bright lines” • Requires substantial due diligence • Trouble meeting new disclosure requirements

  3. ISSUES • Often no single point of contact • No clear process for resolving problems • Late/missing payments • Early termination or “buy down” • Rating downgrades • Lack of uniformity within asset classes • Limited adjustment to changing financial terms or market conditions

  4. MATCHING ASSET & LIABILITY INVESTOR’S EXPECTATION EARLY TERMINATION SCENARIO Reinvestment at lower rate - 20% of principal and interest Assets TERMINATION Liabilities Assets Liabilities Assets Initial Investment 70% of principal and interest 100% of principal and interest

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