2. What is Hildene Capital Management’s investment philosophy?
Hildene seeks opportunistic value in its investments. This has different meanings depending on the risk/return profile of a particular opportunity. Hildene is likely to examine low risk structured credit opportunities because the return profiles are often higher in more complex transactions that have fewer competitors who will consider buying them. With such investments, Hildene is looking for the certainty of receiving back its investment and a good return.

At the other end of the risk spectrum, Hildene also will examine opportunities that are experiencing performance problems and even may be in default. These opportunities offer a different profile and must be examined in a different way. The values of the “optionality” associated with these opportunities often is mispriced by the market and frequently can be picked up at a very low cost. Hildene looks at all structured products opportunities for compelling opportunistic values.

3. Why Hildene Capital Management?
Hildene was founded by Brett Jefferson, who in 2002 became one of the first investors in distressed structured products in a prior distressed cycle. Brett developed a disciplined approach to distressed structured credit investing that captured significant value for investors in the Marathon Structured Finance Fund until he left Marathon in 2006. Brett’s approach revealed that starting in 2006, new issue structured credit opportunities were not suitable for investment, and he was disciplined enough to avoid the traps into which other credit investors fell by exiting the market and staying out during the time that the most irresponsible lending was being originated.

Hildene has an experienced team of professionals and close industry contacts which give it unprecedented access to investment opportunities.

Moreover, Hildene looks at all the structured products opportunities and focuses on compelling asset classes. Some features that Hildene looks for when evaluating an asset class are the barriers to entry, correlation amongst the transactions, structural value and asset optionality.

4. How is distressed investing in structured products different from distressed investing in other products?
Several aspects of structured products are different. First, analyzing a pool of credit assets requires a multi-faceted approach that is more complex than that taken by a traditional credit analyst. The addition of a structure to a pool of assets further complicates the analysis, creating more risks and opportunities for investors. Furthermore, preparation is a key component of structured credit investing. Due to the uniqueness of the assets and the sizes available, you must be proactive to be reactive when an opportunity comes to market or you may never see that security again.

5. What is structural value and why is it important in structured products?
Structural value is one of the most important and overlooked parts of a structured credit investment, especially during stressed markets. Structure determines the allocation of cash that is received from the pool of credit assets, and sometimes certain investors are cut out of the payments. Understanding how that allocation impacts an investment can provide comfort, opportunity, or a warning.

6. What are financial trust-preferred securities (TruPS)?
Trust-preferred securities are a form of preferred shares of financial firms which are required to maintain certain capital requirements by their regulators. Like preferred shares, a financial institution can stop making payments to preserve its capital base. Unlike preferred shares, however, the institution can defer its payment obligations only for 5 years. It must repay all missed payments within 5 years or the institution will be in default and can be forced into bankruptcy. TruPS are considered a cheap form of equity by the firms because they can be counted as part of their tier 1 capital and unlike dividends, the payments are tax-deductible to the firm.

7. What are RMBS securities?
RMBS securities are pools of several thousand residential mortgages. Losses on these types of securities have been blamed for many of the problems with the financial system.

8. What are CMBS securities?
CMBS securities are pools of commercial mortgages, but unlike RMBS securities usually less than 50 assets are in any pool.

9. What are CLOs?
CLOs are securitized pools of corporate loans which are usually senior and secured by a pledge of the assets of the corporation.

10. What are ABS CDOs?
ABS CDOs are a second derivative of other ABS securities, usually comprising pools of RMBS and CMBS securities. The complexity of an ABS CDO introduces the possibility of finding structural values in ABS CDOs, but each transaction is unique and must be examined on its own merits.