Driving CLO reset innovation
The pair have been instrumental in driving market innovation: “Since 2011, CLOs have introduced reset and refinancing options, which has allowed for more flexibility. In 2018, the triple A market tightened, but not enough to reset certain deals. A typical reset had called all debt at par and reissued it with a new five-year investment period. As the term structure developed, we realized it could be more accretive to reinvest for two years rather than five, and this tightened the triple A to 90 basis points versus 130 for a five-year deal. We were one of the first managers to do a reset with a shorter reinvestment period, which is now part of the broader market’s toolkit,” says Mehra.
Mehra and Jefferson also realized that a new SPV enabled de facto resets: “Where resets were not possible, we took control of the underlying collateral, moved it to a new SPV and issued a new CLO, which functionally is akin to a reset,” explains Mehra.
A full vista of the CLO landscape
Unlike ratings- and manager-constrained investors, Hildene hunts for value across the gamut of US CLOs. “We look at the whole capital structure, assets and liabilities, primary and secondary deals and any CLO manager. There is never a bad CLO, just a bad price. We live and breathe a universe of loss-adjusted relative value opportunities, mainly in BSL (broadly syndicated loans), though middle market loans are growing. Our option adjusted framework is agnostic to labels and names,” explains Mehra.
Hotspots move around with the market environment. “Generally, in benign times, we invest in shorter duration, cash-flowing assets such as CLOs, RMBS and ABS. When volatility spikes, liability stacks become dislocated due to rates or credit risk, and we see more interesting opportunities in the secondary market to add duration and convexity to our portfolio,” says Mehra.
Hildene also partners directly with third party CLO managers, via minority acceleration capital stakes. “We provide equity capital and expertise around warehousing and structuring to help CLO managers scale. We have upside if the CLO manager grows. We exited one deal very profitably and remain in two others,” says Jefferson.
Sourcing longer term assets – residential mortgages
Today, Hildene is focused on assets with longer duration profiles, namely in residential mortgages. Jefferson had explored several ways of sourcing mortgages, including working with multiple originators and aggregating bulk in the market, before executing a partnership with CrossCountry Mortgage, the largest retail mortgage originator in the US. The partnership allows Hildene to source residential non-qualified mortgages (non-QM), a type of mortgage often taken out by creditworthy borrowers who are unable to meet traditional mortgage eligibility requirements. These borrowers are typically self-employed, such as doctors and lawyers, and do not receive a W-2 or pay stub to verify their income.
Hildene has securitized these mortgages into RMBS securitizations and generally sells at least the top 90% of the structure while retaining the bottom 6-10% equity and junior mezzanine tranches.
Reinsurance
In 2022, Hildene launched Hildene Re, a Class B(iii) insurance company that offers reinsurance to the global insurance market. In January 2023, Hildene formed a long-term strategic partnership with SILAC Insurance, which is symbiotic for Hildene and SILAC. “We have about $5 billion of reinsurance flow today through SILAC and other carriers. SILAC is an experienced underwriter, and we bring investment management expertise,” says Jefferson.
Jefferson explains: “Reinsuring tax advantaged fixed index annuities involves a liability of around 6% per year, which means assets need to roughly double every 10 years. We need to find assets with the right duration and yield profile to match these liabilities. On the asset side, we need to manage two key risks: prepayments and credit risk. On the liabilities side, we look at deaths and surrenders, though most policies have significant surrender penalties. Some policies have more rate exposure than others, which we seek to hedge. Being experts in structured products helps us get our arms around this complexity.”
“TruPS are a strong fit for the reinsurance company given their duration, discount and credit profile. TruPS are floating rate securities, so we use a few different tools to manage interest rate risk and reduce the variability of the bond’s cash flows,” says Jefferson.
Alignment with investors
If risk is not being attractively rewarded, as in 2019, Jefferson would rather play defense with shorter term and idiosyncratic trades. If no compelling opportunities exist, Jefferson may close a fund and return capital: in 2015, he sold TruPS well above Hildene’s fundamental valuations and returned around $1 billion of capital to investors, then circa 40% of firm assets of $2.4 billion. Many investors who received distributions at the time later returned to reinvest with the firm.
A well aligned strategic partner
After purchasing a secondary interest in a Hildene fund in 2020, Hildene’s relationship with Jefferies blossomed. In March 2022, Hildene entered into a strategic relationship with Leucadia Asset Management (“Leucadia”), a division of Jefferies, whereby Leucadia purchased a non-controlling financial interest in Hildene and agreed to provide seed capital in connection with certain new Hildene investment vehicles and businesses. Respect for alignment with investors was essential when Jefferson sought a strategic partner. “While some providers of seed and acceleration capital may push managers to grow assets above an optimal level, Jefferies respects our judgment on strategy capacity and returning capital,” says Jefferson.
Philanthropy
“At Syracuse University, I enjoyed my first love of lacrosse and later coached high school lacrosse to pay for Northwestern business school,” recalls Jefferson. The Catherine Jefferson Foundation, named after his wife and mother – who were both coincidentally named Catherine – supports the Syracuse University Lacrosse program, of which Jefferson was a member of the 1988 NCAA Division I Men’s Lacrosse National Champion team. Lacrosse was started by Native Americans, and Jefferson sits on the board of a charity that both helps to widen access to lacrosse and supports Native Americans. Jefferson has endowed scholarships at his alma maters Northwestern University and Syracuse University, as well as at Duke University and New Canaan Country School.
Jefferson has consistently been recognized for his philanthropic efforts. He was the recipient of the Syracuse University 2023 Letterwinner of Distinction in recognition of his success after graduation and his mark on the athletics program. Most recently, he received Avon Old Farms School’s 2024 Distinguished Alumnus Award, acknowledging his distinction in professional leadership and philanthropic endeavors, including endowing a memorial scholarship in honor of a former roommate and teammate.
Constructive outlook
Jefferson continues to be optimistic about growth for all pillars of the firm. “Our reinsurance subsidiary, Hildene Re, provides the firm with a competitive advantage through long-term, flexible capital. Our strategic relationship with CrossCountry Mortgage provides a long runway for various types of mortgages, allowing us to continue to expand our capabilities into additional asset classes. We are always thinking creatively and looking to uncover value in structured products. I am so optimistic about the future of Hildene that all my eggs are here; I am not going anywhere for a while.”
