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U.S. Structured Credit Market February 2012

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					                                                                                                                                         February 2012




U.S. STRUCTURED CREDIT MARKET
BY MICHAEL P. HENNESSY
MANAGING DIRECTOR OF INVESTMENTS, MORGAN CREEK CAPITAL MANAG EMENT



                                         U.S. Structured Credit Market Current Status and Outlook for 2012
                                         Many investors remain skeptical about structured credit products following the financial
                                         crisis of 2008. However, the market environment has changed drastically since the crisis
                                         began in 2007 for structured credit products such as U.S. and European residential and
                                         commercial mortgage backed securities (CMBS), consumer asset backed securities (ABS)
                                         and collateralized loan obligations (CLOs). The sector went through a period of significant
                                         deleveraging following the financial crisis and as compromised balance sheets decreased
                                         their exposure. Market pricing now better reflects the true underlying fundamentals of the
                                         asset class, especially the challenging global economic conditions and the weak U.S.
                                         housing market. As the graph shows below, there has been a sharp decline in outstanding
                                         structured credit since its peak in 2007.


                        $s in billions
                                            Decline in Total Structured Credit Outstanding
                        4000
                        3500
                        3000
                        2500
                        2000
                        1500
                        1000
                         500
                             0


                         Source: Federal Reserve, Securities Industry and Financial Markets Association.
                         Note: Structured credit total includes: non-agency mortgage, student loan, credit card, auto and home equity.
                         Note: YTD 2011 as of September 30, 2011.



As is true with many asset classes, the second half of 2011 was a tough period for structured credit, with spreads widening as
global economic conditions continued to decline, driven by the crisis in Europe. Although volatility may continue this year,
investors can take advantage of ongoing low interest rates and favorable supply demand dynamics (similar to that of agency
MBS) by investing in structured credit products. The risk of principal loss will always exist when investing in structured
credit, but to mitigate some of this risk, investors should target senior securities. Additionally, potential asset sales by
European banks, which are becoming increasingly likely, represent an opportunity for investors to access the structured credit
market on a large scale.

New issue markets have been somewhat closed due to increasingly strict lending standards and regulatory reform. These were
once the main facilitators of consumer credit in the U.S. The non-agency commercial and residential mortgage markets have
been hit hard; the number of deals priced since 2008 in the residential mortgage market can be counted on one hand. The
commercial mortgage market issued $228 billion in 2007 compared with only $33 billion in 2011. The consumer ABS market
has been a bright spot, but in general, analysts see net issuance declining $200 billion across the structured credit market this
year. This low net issuance is likely to create a scarcity premium on the highest quality assets and also positive supply/
demand dynamics going forward.
 U.S. STRUCTURED CREDIT MARKET


                     $s in billions
                                                     New Issues of Structured Credit
                     1600
                     1400
                     1200
                     1000
                       800
                       600
                       400
                       200
                          0



                      Source: Federal Reserve, Securities Industry and Financial Markets Association, Commercial Mortgage Alert.
                      Note: Structured credit total includes: non-agency mortgage, student loan, credit card, auto and home equity.
                      Note: YTD 2011 as of December 31, 2011.


In addition to benefiting from positive supply/demand dynamics, the sector is also poised to benefit from increased U.S. bank
deposits. Financial institutions will continue to look to invest in higher quality, shorter duration securities. Deposit growth,
which is apparent given the widening of the deposit to loan ratio, has been driven by the Fed’s quantitative easing programs,
flows out of money markets and deposits moving from European banks to U.S. banks and institutions. The result has been an
uptick within many asset classes, including corporate debt, municipal securities, and U.S. and European structured credit. High
quality CLOs have recently been an area of focus for banks because of their senior status and the fact that they are naturally
hedged against rising interest rates due to their floating rate structure. Should bank deposits continue to climb, analysts expect
an increase in demand for high-quality, lower-duration structured credit.

Outlook for 2012
As investors approach 2012 with similar caution as they did during the latter half of 2011, they will be searching for yield, but
trying to avoid principal loss. Many analysts believe the high quality nature of senior structured credit assets offer the balance
of additional support in hard economic times and the opportunity to profit if current economic conditions improve even
moderately. As stated above, the sector is positioned for a positive supply/demand environment and is primed to benefit from
increased U.S. bank deposits. Investors will still need to be selective within this asset class, but there are many opportunities to
gain yield.

If you have ideas or topic suggestions for Mr. Hennessy’s next thought piece, or if you would like to send us questions,
comments or other feedback on this piece, please contact Andrea Szigethy at aszigethy@morgancreekcap.com. We look
forward to hearing from you.




This document reflects opinions of Morgan Creek as of the time it was written and all such opinions are subject to change. No representation or warranty,
express or implied, is given by Morgan Creek as to the accuracy of such opinions and no liability is accepted by such persons for the accuracy or completeness
of any such opinions.

This document is for informational purposes only. This is neither an offer to sell nor a solicitation of an offer to buy interests in any security. Neither the
Securities and Exchange Commission nor any State securities administrator has passed on or endorsed the merits of any such offerings, nor is it intended that
they will. Morgan Creek Capital Management, LLC does not warrant the accuracy, adequacy, completeness, timeliness or availability of any information
provided by non-Morgan Creek sources.



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