Asset Class
Structured Credit
Structured Credit is credit exposure packaged through structured vehicles (e.g., CLOs, ABS, RMBS/CMBS), where returns are driven by tranche positioning, collateral performance, and structural protections. Allocators evaluate it through transparency, stress behavior, and downside waterfall mechanics.
Structured credit invests in securitized pools of loans or receivables with defined tranching, priority of payments, and triggers. The core underwriting question is not just “credit quality,” but structure integrity.
How allocators define Structured Credit exposure
Segmentation includes:
- Instrument: CLO, ABS, RMBS, CMBS, specialty securitizations
- Tranche level: senior vs mezz vs equity; attachment/detachment points
- Collateral quality: seasoning, defaults, recovery assumptions
- Structural protections: OC/IC tests, triggers, diversion mechanics
- Manager quality: collateral manager incentives and behavior
- Liquidity/valuation: mark volatility and trading depth in stress
Allocator framing:
“When collateral deteriorates, how does the waterfall shift—and who takes losses?”
Core strategies within Structured Credit
- Senior tranches: principal protection, lower yield
- Mezz tranches: spread capture with higher loss sensitivity
- Equity tranches: levered credit beta + manager skill
- Niche ABS: idiosyncratic collateral underwriting
Portfolio role
Used to:
- Generate yield with defined structural protections
- Add diversified credit exposure (when correlation is understood)
- Express tactical spread views with explicit downside modeling
Manager evaluation
Conviction increases when:
- Collateral and structure are transparent and modelable
- Stress tests are detailed and conservative
- Governance and reporting are institutional-grade
- Manager has a documented playbook in downgrades/default cycles
- Liquidity and mark management are honest
What slows decisions
- Opacity on collateral and triggers
- Overreliance on ratings without structure modeling
- Liquidity mismatch vs fund terms
- Unrealistic recovery assumptions
Common misconceptions
- “Ratings solve underwriting” → structure and manager behavior matter.
- “Diversified collateral means low risk” → correlation spikes in stress.
- “Equity tranches are just yield” → they are levered, path-dependent bets.
Key allocator questions
- What is the attachment/detachment and downside breakpoints?
- Which triggers divert cash flows under stress?
- How sensitive is the tranche to defaults and recoveries?
- What is liquidity in spread blowouts?
- How did similar structures behave in prior stress regimes?
Key Takeaways
- Structured credit is underwriting waterfalls and triggers, not labels
- Transparency and conservative stress testing are required
- Liquidity and valuation discipline matter materially