Loan Note: Banks retreat as lenders eye more complex market; US commercial property growth slowing

It's a more complex, specialist world of investing. Further thoughts arising from our Europe Summit. Plus: signs of slowing growth in US commercial property; and European leveraged loan issuance plummets. Here's today's brief for our valued subscribers only.

They said it

“A strong dollar feeds into inflation pressures abroad and makes it more difficult to service dollar-denominated debt”

From an article, ‘Global Repercussions of the Strong Dollar’, by Econofact

First look

Funds to the fore as banks retreat
Following our Europe Summit and subsequent conversations with market sources, here are some of the issues getting a frequent airing:

  • Traditional lenders are risk off: Banks are retreating from a spectrum of activities, from capital call lines to the syndicated loan market. From a private credit point of view there are opportunities, and there was a small rebound in direct lending activity between Q1 and Q2, perhaps partly due to the syndicated market shutdown. Also, increased innovation is valued as traditional sources of financing dry up. In various guises, private credit comes to the fore in a dislocated market.
  • Lenders getting choosy: The US market has seen a shift back to lenders from a pricing perspective, with spreads having increased at least 100 basis points, if not more. Lenders have also decreased their hold sizes and sponsors, therefore need to bring in more lenders into clubs, and lenders can be very choosy about which deals they want to do. With senior yielding 10 percent or more and junior at close to mid-teens, returns are said to be rivalling private equity.
  • More complexity: It’s a much more complex investing environment and selection of assets is where managers will win or lose. Terms are becoming more creditor friendly and private credit is now taking half of deals getting done in the corporate space, up from a historic proportion of about 15-20 percent. Market share of 20-30 percent is predicted for the long run.
  • Embracing specialism: Sophisticated LPs are using current conditions to construct well diversified portfolios and embrace different segments of the market. To generate alpha, they want niche, specific offerings with competitive advantage. The ideal is a base of bigger stable funds, augmented with specialist managers and differentiated returns.
  • Puzzling over currency: LPs are hesitant to make commitments in the remainder of 2022 and most are looking ahead to 2023. One issue they are considering is foreign exchange, with investors in Europe wondering whether they should invest in dollars, given that currency’s relative strength. There is a relative value judgement to be made.

MSCI’s RCA: property owners are losing capital value

According to a new report from MSCI’s Real Capital Analytics on its commercial property price index, the pace of annual growth in commercial property prices in the US has slowed to such a rate that owners are losing in real terms.

By standard definition, capital value is the value that would have to be paid for a given asset or bundle of assets if it were to be purchased at the time of evaluation.

The RCA National AllProperty CPPI was up a modest 11.1 percent year-on-year and rose less than 0.05 percent month-on-month.

That monthly rate annualises to growth of 0.6 percent, which is well below the rate of inflation in the US economy. That suggests that owners of commercial real estate are losing capital value in real terms. A year ago, the same index showed an annualised growth rate above 25 percent.

Geographically, MSCI RCA CPPI tracks the “six major metros” separately from other markets. The major metros are Boston, Chicago, Los Angeles, New York, San Francisco and Washington DC. Price change in major metros was negative from August to September, and since September 2021 the price index is in the black, but only 3.7 percent.

Considered by sector, there has been a slowdown in price growth across the board of commercial property sales. Industrial properties’ prices grew 18.1 percent year over year. This is the first time that number has been below 20 percent since August 2021.  The corresponding number for office prices is 6.8 percent.

This dramatic easing of price growth results from a slowdown in deal activity on the one hand and rising financing costs on the other, according to the report.


European leveraged loans struggle
Volatility and recession risk will continue to plague European leveraged loan issuance, according to Fitch Ratings’ Leveraged Loan Market Insight Report for the third quarter of 2022.

The report found issuance fell to €90.9 billion in the year to September, down 30.6 percent from just over €131 billion in the year to September 2021.

Trailing 12-month defaults are on the rise from a low level of 0.9 percent in August, reaching 1.4 percent at the end of September and tipped to increase to 2.5 percent by the end of 2022 and 3.0 percent in 2023. By way of context, the rate was 3.7 percent at the end of 2020.

KKR backs trade financier 
Flexport Capital, the trade financing arm of freight forwarding business Flexport, has secured a credit facility of up to $200 million from insurance accounts managed by KKR. The credit facility will allow Flexport Capital to continue building a financing product within its platform, while investing in client growth and geographic expansion.

Flexport Capital provides companies with flexible working capital for inventory and logistics expenses. Global trade has been tumultuous in recent years, leaving many businesses overstocked and struggling to pay vendors due to rising supply chain costs. As a result, demand for accessible and flexible financing solutions is high.

Flexport Capital says businesses can access flexible terms on shipments processed by its platform. The firm uses logistics data to gain deep visibility into a customer’s overall supply chain health and understand their working capital needs. It then evaluates purchase order data and inventory-in-transit to provide liquidity to businesses across a broad range of industries, such as retail, industrial manufacturing and electronics.

LP watch

Institution: New York State Common Retirement Fund
Headquarters: Albany, US
AUM: $246.3 billion
Allocation to alternatives: 27.1%

New York State Common Retirement Fund (NYSCRF) has committed $350 million to Blackstone Green Private Credit Fund III (BGREEN III), according to materials from its board meeting.

BGREEN III, managed by Blackstone, will invest in subordinated/mezzanine debt across North America.

NYSCRF’s recent fund commitments have predominantly targeted North American vehicles focused on a variety of sectors. In 2022, NYSCRF has committed around $1 billion to debt.

Today’s letter was prepared by Andy Thomson with John BakieChristopher Faille and Robin Blumenthal