Loan Note: CFOs struggling with ESG; Asian leveraged finance shows resilience

Issues around cost and complexity are challenging CFOs when it comes to ESG, a new study finds. Plus: Asian leveraged finance was in strong shape in 2021, while Capra Ibex suggests looking away from primary deals and towards secondaries in the CLO equity market. Here's today's brief for our valued subscribers only.

They said it

“It’s worth remembering that almost all the economic fundamentals in place last week are in place today. A global rate rising cycle still looms and US growth is still sturdy”

Taken from the Financial Times‘s Unhedged opinion column (“Ukraine is not yet a markets crisis”).

First look

Costs and complexity hinder ESG efforts
Talk about environmental, social and governance implementation is not necessarily being backed up by action, with one-fifth of global private funds’ chief financial officers saying that their firm is yet to start making ESG part of its investment process.

A report from Netherlands-based administration services provider Intertrust Group and Global Custodian magazine has found that while 95 percent of CFOs realise investors view ESG as being important, only 28 percent have completed ESG integration processes.

More than half of CFOs (57 percent) said constraints relating to cost and resource were the most challenging aspect, while the complexity of managing multiple sources of ESG data was cited by 51 percent and quantifying and monitoring the implementation process by 48 percent.

But while there are certainly issues to overcome, Intertrust warns that funds “must either meet the demands or face significant competitive disadvantages and possibly regulatory pressures in the future”. The study canvassed the views of more than 300 global CFOs in more than 30 jurisdictions.

Asia-Pacific saw strong loan issuance last year
Despite tough times in China due to disruption caused by the pandemic and dislocation in the real estate market, Asian leveraged finance enjoyed a strong year in 2021 according to a report from law firm White & Case.

Combined high-yield bond and leveraged/non-leveraged loan issuance rose from just over $422 billion in 2020 to $498 billion last year, with loan issuance alone increasing by 24 percent from $332.5 billion to $412 billion.

Private equity and institutional M&A deals were the main drivers of issuance, with infrastructure dealflow particularly strong.

Despite its challenges, China’s loan market reached $100 billion with a drop in high-yield borrowing in the real estate market mitigated by strong activity in other sectors such as energy, industrials and financial services.

Shift from primary to secondary in CLO equity
The pendulum in the collateralised loan obligation equity market is in the process of swinging away from new issues and towards secondary deals, according to Mike Kurinets, chief investment officer of structured credit fund manager Capra Ibex Advisors, in conversation with Private Debt Investor.

He said the CLO equity specialist was focused on new issues in the first three quarters of last year with activity “off the charts” and new issues offering higher risk-adjusted yield. But he says this trend has now come to an end with the onset of increased volatility.

“As volatility increases and loans get sold off, it becomes more difficult to place CLO liabilities and find investors for the equity,” he told us. This is not a problem for the largest operators in the CLO market, which have access to captive capital and can therefore “print deals regardless of volatility”, but it’s a problem for everyone else.

He predicts new issue activity slowing down this year as investors increasingly turn to the secondary market where he believes there is a “not insignificant” yield difference of between 2-3 percent. “In the secondary market, you don’t always get the size you want but you do get the value,” Kurinets told us.


Experienced investor joins Star Mountain as adviser
New York-based Star Mountain Capital, a fund manager focused on small and medium-sized North American businesses in the lower mid-market, has appointed Dennis Duerst as a senior adviser.

Duerst was most recently president at 3M Investment Management Corporation, a $25 billion investment fiduciary for 3M’s global retirement plans. He launched initial investments in hedge funds and private credit and focused on absolute return and private market investing. He had previously been director of financial risk management where he led 3M’s global capital markets and risk management activities.

Duerst is currently a member of the investment advisory council for the $130 billion Minnesota State Board of Investments as well as a member of the board of directors and chair of the finance and investment committees for the $90 million St Croix Valley Foundation.

Blue Owl adds CLO specialist Wellfleet
New York-based fund manager Blue Owl Capital has agreed to purchase Wellfleet Credit Partners from affiliates of Connecticut-based investment firm Littlejohn & Co. The transaction is expected to close in March subject to certain conditions.

Founded in 2015 as the performing credit arm of Littlejohn, Wellfleet manages collateralised loan obligation portfolios of broadly syndicated leveraged loans. It also invests in third-party CLO equity and junior mezzanine tranches on behalf of separately managed accounts.

By the end of last year, Wellfleet managed 16 CLOs with more than $6.5 billion in assets under management. The firm is led by veteran leveraged finance professionals Scott McKay and Dennis Talley, who will continue as lead portfolio managers for the platform after the acquisition.

UK finance arm provides targeted loans in Nigeria
CDC Group, the UK Government’s development finance institution, has announced a $100 million finance facility to First Bank of Nigeria Limited. The new facility will direct funding to women-owned and led businesses as well as to local small and medium-sized enterprises in Nigeria.

The deal will support FirstBank, one of Nigeria’s largest banking groups, to deliver financial solutions that help address the challenge of limited access to capital faced by underbanked and underserved groups in the country.

As part of the new facility, a minimum of $30 million will be allocated in the form of credit lines to women entrepreneurs. The facility will also support FirstBank’s ‘FirstGem’ gender-focused services offering, which takes steps to promote gender inclusion by improving lending and support to female entrepreneurs.

LP watch

Institution: Texas County & District Retirement System
Headquarters: Austin, US
AUM: $42 billion
Allocation to alternatives: 52.6%

Texas County & District Retirement System has approved a $200 million commitment to Cerberus Real Estate Debt Fund II and a follow-up commitment of $150 million to Crescent (TX) Direct Lending Fund, according to the pension’s recent investment activity published on its website.

This brings the overall commitment amount to $600 million to the direct lending fund. Previously in 2019, the Texan retirement system had allocated $150 million to the predecessor fund of the real estate debt series.

The $42 billion public retirement system has a target allocation of 29 percent to private credit facilities, which currently stands at 24 percent.

Today’s letter was prepared by Andy Thomson with John Bakie and Robin Blumenthal.