Peritus Credit Partners
HISTORY
PERITUS CREDIT PARTNERS LLC

Growth
& Development

There were two predecessor companies to Peritus Credit Partners; the first being Peritus Asset Management (“PAM”) which I founded in 1995 and then relaunched under Gateway Credit Partners (“GCP”) upon the closure of PAM in 2018. PAM focused initially on actively managed high yield bond strategies developing its track record in Separately Managed Accounts (“SMA”) from 1995-2000.

• The Street came calling in 2000 to discuss structured credit including Collateralized Bond Obligations (“CBO’s). We were a pass initially on these structures based on too broad of a portfolio and too much leverage. In hindsight that was a wise move even if it was just luck. We wanted to run a tight, actively managed and fundamentally driven portfolio.

• In 2002, the high yield bond market suffered a meltdown with the Enron and Worldcom scandals hitting in July of that year. This was one of the biggest events in high yield history. Approximately 1/3 of the market was known as ”TMT” or Telecom, Media and Technology, which experienced a nuclear winter. We felt that the telecom space had become ridiculously cheap because the bad business models known as CLECs (Competitive Local Exchange Carriers) were defaulting and dragging down all telecom and technology companies. This contagion convinced us the time was right to re-visit structured credit.

• We were approached by Guggenheim-Links to build a structure that allowed for a more concentrated portfolio (60-70 names) and a fully actively managed approach. That deal was deal 1, a cash flow CBO called Prado CDO Ltd. which closed in 2003. We had given considerable thought to the various tripwires in these structures including a very small CCC bucket so we negotiated this upwards from a standard 5% to 15%. This allowed the structure to withstand a significant ratings migration issue should the cycle turn. We also believed that fundamental portfolio management could more than make up for less leverage. The deal was $350mm and closed in November of 2003. The equity was in the form of fixed rate notes and was funded by HNW investors. We continued to maintain a large and growing SMA business as well.

• We launched deal 2 with Bank of New York in late 2004 and closed in May of 2005-Peritus I CDO Ltd. It was a very similar deal to the Prado transaction in terms of size and leverage. We did have a leveraged loan bucket that equated to 10% as the leveraged loan market was beginning to take shape. We secured a large institutional investor as our anchor in the equity (also fixed rate subordinated notes ) with Bank of NY and additional institutional investors filling out the remainder.

• Our structures were tested by the financial crisis and the room we had bought in ratings and OC/IC (Over-Collateralization/Interest Coverage) paid off. We were able to add collateral in our deals when others were forced to sell; particularly in Q1 2009. However, one lesson learned was the lack of offers after the first wave of panic set in. This gets to the often, fictional nature of systemic trades in periods of distress. It is often a paper tiger.

• Given the lockup of the CDO market and the changing regulatory environment with Dodd-Frank, we began to explore other delivery vehicles. We were approached by Advisor Shares an Exchange Traded Fund (“ETF”) platform about our interest actively managing a high yield ETF. I told them that we weren’t interested because mutual funds (which is what I considered ETFs) get both redemptions and positive flow at the wrong time. They told me we could do cash creates and in-kind redemptions which got my attention and ultimately won us over.

• We worked with Advisor Shares to launch this vehicle in December 2010, which became the first actively managed High Yield Bond ETF. Given that they did not have much marketing muscle we took on marketing folks internally to improve the sales effort. Given the lack of correlation to the high yield indexes (along with significantly higher yields) we found that “competitors” (high yield ETFs such as JNK and HYG along with high yield mutual funds) were actually customers and ended up owning our fund.

• In 2012, we constructed a deal with one of the biggest hedge funds in the world where they would invest $100 million into HYLD for a piece of the fees. Unfortunately, that deal was not doable as this investment would cause this fund to become a control person under the 1940 Act regulations which they did want to be. They chose to invest capital in the management company itself to help build out distribution and take a revenue interest in Peritus.

• The HYLD product was managed for 8 years (2010-2018). Assets grew slowly over the first 2-3 years and then exploded by 2014. At the top in 2014, the product has $1.3 billion. We began to receive significant outflows in late 2014 and 2015 as oil collapsed. At that time energy was the biggest industry segment in High Yield representing over 20% of the market.

• By the end of 2017 Advisor Shares sold HYLD to an independent ETF platform that looked to take the fund in another direction using technical analysis. We helped to migrate that fund over and provided consulting services to HYLD through 2018.

• I launched a successor company to PAM in 2019 named Gateway Credit Partners (“GCP”). At this point the opportunities that had existed in the high yield bond market had fully migrated to loans. I developed a number of partnerships, first to launch a lower levered public BSL-CLO which we did in early 2020. Unfortunately, we picked a March 2020 close date and an Act of God (so to speak) did not allow this transaction to close—Covid destroyed this transaction. Afterwards I began to explore several other distribution channels including a privately structured (single tranche) CLO, and another ETF. While much progress was made, investor enthusiasm for sub-optimal delivery vehicles and my own concerns over liquidity mismatches forced us to re-examine this process.

Growth
& Development

There were two predecessor companies to Peritus Credit Partners; the first being Peritus Asset Management (“PAM”) which I founded in 1995 and then relaunched under Gateway Credit Partners (“GCP”) upon the closure of PAM in 2018. PAM focused initially on actively managed high yield bond strategies developing its track record in Separately Managed Accounts (“SMA”) from 1995-2000.

• The Street came calling in 2000 to discuss structured credit including Collateralized Bond Obligations (“CBO’s). We were a pass initially on these structures based on too broad of a portfolio and too much leverage. In hindsight that was a wise move even if it was just luck. We wanted to run a tight, actively managed and fundamentally driven portfolio.

• In 2002, the high yield bond market suffered a meltdown with the Enron and Worldcom scandals hitting in July of that year. This was one of the biggest events in high yield history. Approximately 1/3 of the market was known as ”TMT” or Telecom, Media and Technology, which experienced a nuclear winter. We felt that the telecom space had become ridiculously cheap because the bad business models known as CLECs (Competitive Local Exchange Carriers) were defaulting and dragging down all telecom and technology companies. This contagion convinced us the time was right to re-visit structured credit.

• We were approached by Guggenheim-Links to build a structure that allowed for a more concentrated portfolio (60-70 names) and a fully actively managed approach. That deal was deal 1, a cash flow CBO called Prado CDO Ltd. which closed in 2003. We had given considerable thought to the various tripwires in these structures including a very small CCC bucket so we negotiated this upwards from a standard 5% to 15%. This allowed the structure to withstand a significant ratings migration issue should the cycle turn. We also believed that fundamental portfolio management could more than make up for less leverage. The deal was $350mm and closed in November of 2003. The equity was in the form of fixed rate notes and was funded by HNW investors. We continued to maintain a large and growing SMA business as well.

• We launched deal 2 with Bank of New York in late 2004 and closed in May of 2005-Peritus I CDO Ltd. It was a very similar deal to the Prado transaction in terms of size and leverage. We did have a leveraged loan bucket that equated to 10% as the leveraged loan market was beginning to take shape. We secured a large institutional investor as our anchor in the equity (also fixed rate subordinated notes ) with Bank of NY and additional institutional investors filling out the remainder.

• Our structures were tested by the financial crisis and the room we had bought in ratings and OC/IC (Over-Collateralization/Interest Coverage) paid off. We were able to add collateral in our deals when others were forced to sell; particularly in Q1 2009. However, one lesson learned was the lack of offers after the first wave of panic set in. This gets to the often, fictional nature of systemic trades in periods of distress. It is often a paper tiger.

• Given the lockup of the CDO market and the changing regulatory environment with Dodd-Frank, we began to explore other delivery vehicles. We were approached by Advisor Shares an Exchange Traded Fund (“ETF”) platform about our interest actively managing a high yield ETF. I told them that we weren’t interested because mutual funds (which is what I considered ETFs) get both redemptions and positive flow at the wrong time. They told me we could do cash creates and in-kind redemptions which got my attention and ultimately won us over.

• We worked with Advisor Shares to launch this vehicle in December 2010, which became the first actively managed High Yield Bond ETF. Given that they did not have much marketing muscle we took on marketing folks internally to improve the sales effort. Given the lack of correlation to the high yield indexes (along with significantly higher yields) we found that “competitors” (high yield ETFs such as JNK and HYG along with high yield mutual funds) were actually customers and ended up owning our fund.

• In 2012, we constructed a deal with one of the biggest hedge funds in the world where they would invest $100 million into HYLD for a piece of the fees. Unfortunately, that deal was not doable as this investment would cause this fund to become a control person under the 1940 Act regulations which they did want to be. They chose to invest capital in the management company itself to help build out distribution and take a revenue interest in Peritus.

• The HYLD product was managed for 8 years (2010-2018). Assets grew slowly over the first 2-3 years and then exploded by 2014. At the top in 2014, the product has $1.3 billion. We began to receive significant outflows in late 2014 and 2015 as oil collapsed. At that time energy was the biggest industry segment in High Yield representing over 20% of the market.

• By the end of 2017 Advisor Shares sold HYLD to an independent ETF platform that looked to take the fund in another direction using technical analysis. We helped to migrate that fund over and provided consulting services to HYLD through 2018.

• I launched a successor company to PAM in 2019 named Gateway Credit Partners (“GCP”). At this point the opportunities that had existed in the high yield bond market had fully migrated to loans. I developed a number of partnerships, first to launch a lower levered public BSL-CLO which we did in early 2020. Unfortunately, we picked a March 2020 close date and an Act of God (so to speak) did not allow this transaction to close—Covid destroyed this transaction. Afterwards I began to explore several other distribution channels including a privately structured (single tranche) CLO, and another ETF. While much progress was made, investor enthusiasm for sub-optimal delivery vehicles and my own concerns over liquidity mismatches forced us to re-examine this process.

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