Dynamic Credit: Revealing Opportunities in Fixed IncomeDynamic Credit: Revealing Opportunities in Fixed Income
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Dynamic Credit: Revealing Opportunities in Fixed Income

Mike Li - Managing Director New YorkMike Li18 April 2019

Dynamic Credit was founded over 15 years ago in New York as a fixed income asset management firm specializing in Asset Backed Securities and has since matured into a global asset manager and direct lender offering a full suite of products and services tailored to fit specific needs of fixed income investors of all types and sizes. Despite our evolution as investors and as a company, the underlying question which drives us every day has remained constant: how do we help our clients to achieve attractive returns from credit in an everchanging world?

The 2018 performance of asset-backed securities (ABS) markets in general can roughly be divided into two parts. In the first half of the year leading into the summer, markets slowly drifted higher and reached their all-time lows in spread terms around May. After a slow summer session, volatility dominated the markets in the second half of the year with the most dramatic spread widening in the fourth quarter across all sectors and risk segments.

Our search for opportunities has led us to expand from our core ‘DNA’ of ABS to an innovative business which combines deep experience and expertise in analyzing, valuing, and managing credit products

Our search for simple and lower-cost products which can achieve higher returns for investors and lower costs for borrowers then led us to complement our ABS strategies with a direct lending offering for institutional investors. In 2014, we launched our first mortgage brands in the Netherlands (Woon Bewust & Goede Start) to directly originate mortgages on behalf of two large Dutch insurance companies. One year later, we set up the first online mortgage platform in the Netherlands, bijBouwe, to further improve the borrower experience. In the last four years, our direct lending business has directed more than EUR 10 billion of investment capital from our institutional clients to the origination of over 69,000 mortgage loans, helping finance real houses and the families living in them.

Our search for opportunities has led us to expand from our core ‘DNA’ of ABS to an innovative business which combines deep experience and expertise in analyzing, valuing, and managing credit products with unique insight into lending markets and underlying economic conditions that comes from direct contact with, and financing of, tens of thousands of consumers and small businesses. While our experience as investors has made us an excellent lender, the knowledge and insight gained from the hard work of building a lending business make us arguably even better investors.

The end of Q1 2019 brought a couple of exciting developments for Dynamic Credit, including the official launch of our new Buy-to-Let mortgage product in the Netherlands as well as the launch of our new brand identity and website which better articulates our company mission and values. While we are proud of what we have achieved, we also wanted to take this opportunity to share some of the lessons that we learned along the way that are reflected in our refreshed branding.

Mission: Making complexity transparent through data and sophisticated models

Dynamic Credit was founded by CEO Tonko Gast more than 15 years ago with the simple mission to make complexity transparent. Armed with a proprietary analytical platform for credit risk and as one of the first major users of historical loan performance data, we sought to help investors make sense of the increasingly complex ABS structures. After an initial focus on managing securitized loan portfolios for institutional investors, Dynamic Credit launched an advisory practice catering to clients including banks, insurance companies, pension funds, regulators and central banks. Most notably, in 2008, Dynamic Credit advised the Dutch Central Bank and the Dutch Ministry of Finance on the USD39 billion US Alt-A[1] RMBS portfolio of ING Bank.

Dynamic Credit and our team of 28 spent four weeks modelling, analyzing, and stress testing the 600,000 mortgages behind[2] ING’s US Alt-A RMBS portfolio to provide realistic valuations and mortgage loss scenarios. Tonko Gast later explained our insights to a Dutch Parliamentary Inquiry Commission. Five years later, the Dutch State announced a profit of EUR 1.4 billion on the sale of its bailout stake in ING Illiquid Assets Backup Facility – one of the few bank bailouts that managed to protect taxpayers and return a profit[3]. Despite our own successes, the broader lesson learned was that transparency is admirable, but the goal should be less complexity.

Mission updated: “A better match between savings and credit”

Our International expansion began in 2009 with the opening of the Amsterdam office on the back of demand for our services in Europe in the aftermath of the financial crisis. Our extensive work in the early post-crisis years left us with a fundamental understanding that searching for stable, attractive returns is one and the same as creating responsible and sustainable financial products for borrowers; in other words, investors can do well in the long run only when borrowers do well . With a new mission to create a better match between savings and credit, we launched our Defensive ABS Strategy for family office investors in 2012, which lead to our AIFMD-licensed Defensive Strategy Fund in October 2017. The strategy focuses on identifying high quality loans in ABS through a combination of rigorous quantitative and qualitative analysis and has returned over 60%[4] from January 2012 to December 2018.

Our search for simple and lower cost products which can achieve higher returns for investors and lower costs for borrowers then led us to complement our ABS strategies with a direct lending offering for institutional investors.

Our search for simple and lower-cost products which can achieve higher returns for investors and lower costs for borrowers then led us to complement our ABS strategies with a direct lending offering for institutional investors. In 2014, we launched our first mortgage brands in the Netherlands (Woon Bewust & Goede Start) to directly originate mortgages on behalf of two large Dutch insurance companies. One year later, we set up the first online mortgage platform in the Netherlands, bijBouwe, to further improve the borrower experience. In the last four years, our direct lending business has directed more than EUR 10 billion of investment capital from our institutional clients to the origination of over 69,000 mortgage loans, helping finance real houses and the families living in them.

In 2017, Dynamic Credit entered into a strategic partnership with Aegon, who became a 25% shareholder of Dynamic Credit[5]. The new alliance aims to strengthen our position as one of the largest direct lenders in the Netherlands through new products, such as the consumer buy-to-let (BTL) mortgages and small business (SME) loans. We are also excited to announce a new Fund alongside the Defensive Strategy Fund: the Diversified Loan Fund (DLF), which will give investors access to a high yield, low duration, diverse portfolio of consumers and small business loans from multiple lenders and countries.

‘Dynamic’ is not just our brand, but a core part of who we are

When Dynamic Credit began its journey 15 years ago, little did we know then how much we would learn, grow, and adapt to the changing market conditions around us. However, the lessons learned and experiences gained during our evolution from a technically sophisticated, but inexperienced start-up to a mature direct lender and asset manager will prove invaluable as we search for and reveal the opportunities of tomorrow to our clients. Our 89 colleagues around the world, consisting of over 25 nationalities, are working as a single team to achieve our mission to create a better match between savings and credits for a more prosperous and sustainable society. Welcome to a world of opportunities! Welcome to the bright side!

Footnotes

[1] Alternative-A (“Alt-A”) mortgages were made to individuals with good credit scores, typically above 680 FICO, but with some risky loan characteristics (e.g. high loan-to-value (“LTV”) ratios, limited documentation, etc.)

[2] https://www.ft.com/content/39a0f064-f6dc-11dd-8a1f-0000779fd2ac

[3] https://dynamiccredit.com/publications/dynamic-credit-advised-dutch-state-makes-eur-1-4-billion-profit-on-ing-alta-portfolio

[4] This rate of return is a combination of an unaudited and self-administrated rate for managed accounts with a similar strategy as the Defensive Strategy Fund and returns of the Fund Class A1 shares from Oct 2017 onwards. All returns are gross of fees and expenses and before tax implications.

[5] https://www.aegon.com/investors/news-releases/2017/aegon-partners-with-dynamic-credit/

Disclaimer

The information contained in this article (including any expression of opinion or forecast) has been obtained from, or is based on, sources believed by Dynamic Credit and its associated companies to be reliable, but are not guaranteed as to its accuracy or completeness. Such information is provided without obligation and on the understanding that any person who acts upon it or changes his investment position in reliance on it does so entirely at his own risk. The information contained herein is suited for professional investors only and does not constitute an offer to buy or sell or an invitation to make an offer to buy or sell shares in any investment referred to herein. Information in this article is current only as at the date it is first published and may no longer be true or complete when viewed by you. All information contained herein may be changed or amended without prior notice although neither Dynamic Credit and nor any of its associated companies undertakes to update this site regularly. Past performance may not be a reliable guide to future performance.

NOTHING CONTAINED IN THIS ARTICLE CONSTITUTES INVESTMENT, LEGAL, TAX, OR OTHER ADVICE OR RECOMMENDATION, NOR IS TO BE RELIED ON IN MAKING AN INVESTMENT OR OTHER DECISION. YOU SHOULD OBTAIN RELEVANT AND SPECIFIC PROFESSIONAL ADVICE BEFORE MAKING ANY INVESTMENT DECISION.

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Bart van der Noord - Institutional Sales
Bart van der Noord
Bart van der Noord