In an effort to provide even greater transparency around our offerings and our investment platform, Prath Reddy and the capital markets team provide weekly updates.
Listen below for Prath’s most recent views on our short-term note program and the current private credit landscape from Cadence’s perspective.
Please find the transcript for this video below.
Hey everyone, this is Prath Reddy, Head of Capital Markets here at Cadence. Thank you for tuning in to this week’s STNP market update for the week ending June 12, 2020 where we provide news and insights that are relevant to our short term note program market.
Zooming out on the broader markets this past week, U.S. equities were trending generally higher across the board up until Thursday, when it seems the market finally laid in the prospect of a much longer road to recovery on the back of cautious comments coming out of the Fed and COVID-19 cases rising in some states where stay-at-home orders have been lifted.
All major indices were down anywhere between 5 and 7%, which was the largest single-day drop since mid-March. However, it does seem like will see a decent rally to close out the week as we continue with what I think is very much an event-driven trading market at the moment.
Switching gears to fixed income markets, treasuries did rally this week as a decent flight to quality bid ensued away from risk markets. The 10-year is settling right around 70 basis points, which now is about 20 basis points tighter over the week. Unsurprisingly credit spreads did widen over the course of the week in all major markets as macro risks began to weigh in here as well.
IG is off roughly 15 basis points over the week while the high-yield index moved from 536 to 620, so about 85 wider there as well. Issuance was running at a decent clip up until yesterday, where many issuers were advised to stand down, so we’re all ultimately ending up with a relatively lighter week across the board, but we did see a few more esoteric and off the run ABS offerings done this week. So, it’s definitely encouraging to see the ongoing demand for structured credit.
Now, diving into the STNP Market this week. It was a fairly busy one with four deals pricing for a total of just over $5.6 million. This brings our year-to-date total to just shy of $69 million and $112 million since Inception.
From a flows perspective, there was one day this week with a large outflow alongside investors changing in and out of a large roll, but we’re certainly still tracking well into net inflow territory over the past three weeks and plenty of cash gonna sit on the sidelines kind of patiently waiting for upcoming new issues.
And in terms of demand and spreads overall, we are continuing to run at full or oversubscriptions on all of our offerings which has allowed us to materially tighten pricing on some STNPs to slowly walk back towards where we were pre-COVID, which was great to see as our Dutch auction system continues to play a critical role in price discovery in an otherwise extremely opaque asset class.
Quickly taking a look at each of the offerings that priced this week – on Monday, we closed 2-K which is an upsized $4 million offering with Wall Street Funding that came in a four-month hybrid format two months interest only, two months amortizing, that’s callable every month. This trade was a roll of their prior three-month hybrid note, so slight duration extension here and it priced at 14.75% which was the same level as the prior three-month note, so effectively a new issue concession. Demand for Wall Street Funding remained very strong given the daily performance report showing that over 80% of their book is repaying the relatively high coupon in a senior position, and the high first loss over collateralization I think are all positive elements of this program. All these factors allowed us to effectively upsize this note by roughly 20%.
On Tuesday, 3-R closed with Pollen VC, which was a $1,000,000 three-month callable note that priced at 10%. We continue to see significant demand for this STNP as the underlying collateral here has performed very well amid the pandemic and as such Pollen offerings continue to become fully oversubscribed by existing rollover investors. This has translated to further negative new issue concessions as well to the tune of 50 basis points on this offering which we expect to continue until the Pollen program expands capacity in the coming months.
Moving along, we closed 11E on Thursday with Axle which was a $50,000 one-month subordinated note offering that priced at 16%. Given the continued small size of this program, pricing was further tightened from the 17.5% of the prior note thanks to a 20 times over subscription level during the auction which allowed us to launch the note with much tighter pricing and was fully subscribed by existing note holders. We do anticipate this program to grow in the coming months, as well, as Axle’s origination volumes pick up.
And finally we close 7H with ThunderRoad today, which was a rollover of their prior three-month 11.5% note. This new note was the same size, but a slightly different hybrid structure with the two-month interest-only period and a one-month amortization period that is callable monthly, which as I mentioned a few weeks ago is the standard hybrid structure we’re planning to migrate all of our STNPs towards to afford flexibility to build our originators and facilitate liquidity events to our investors.
Looking ahead to this upcoming week will have offerings with Northwest Capital, Pollen and SALT open for investment that we auction this week and the capital markets team has been hard at work onboarding a few new originators that we plan to launch towards the end of this month. We continue to focus on only the best-in-class data-driven lenders, and we’re certainly excited to unveil these new STNPs so that we can further diversify the marketplace and allow investors to construct portfolios to meet their own individual investment objectives.
And that’s it for us this week, but thanks for tuning in. Hope everyone has a great weekend and looking forward to catching up with everyone again next week.
Nothing in this video should be construed as an offer to sell securities or a solicitation of an offer to buy securities. All investment involves risk and the possibility of loss, including loss of principal, and neither past performance nor forward looking information is a guarantee of future results.