Loan Note: Credit stages returns recovery in Q1; ICG expands in Australia

Direct lending bounces back in the first quarter of 2020 with strong positive returns. Plus: ICG adds a significant player to its Australian operation and banks ditch mortgage securities for treasuries. Here's today's brief for our valued subscribers only.

They said it

“Portfolio sales will be gradual and orderly, and will aim to minimise the potential for any adverse impact on market functioning by taking into account daily liquidity and trading conditions for exchange traded funds and corporate bonds.”

A Federal Reserve statement on its plans to unwind corporate debt positions it acquired as part of the covid-19 pandemic response.

First look

First-quarter direct lending marches on
Direct lending rose 3.24 percent in the first quarter, swinging from a loss of 4.84 percent in the first quarter of 2020, when the covid-19 pandemic broke out in the US, according to the Cliffwater Direct Lending Index.

The unlevered index, which tracks the performance of mid-market loans, gross of fees, jumped 14.41 percent for the trailing four quarters. Senior only loans rose 2.89 percent in the quarter, and 15.23 percent for the trailing four quarters. Realised CDLI credit losses (defaults less recoveries), which generally lag behind economic downturns, slowed considerably to 0.19 percent in the quarter.

Although the CDLI yield fell to 9.16 percent in the first quarter, it remained well above the 3.71 percent yield on the S&P LSTA Leveraged Loan Index, which also declined in the quarter.

ICG heads Down Under for real estate
London-headquartered investor Intermediate Capital Group is banking on real estate debt demand in Australia with the acquisition of Newground Capital Partners.

The investment manager was founded in 2009 and has offices in Brisbane, Sydney and Melbourne, and will give ICG a significantly expanded presence in Australia and New Zealand.

ICG has already been active in Australian lending for several years and the acquisition of Newground will give it a major foothold in real estate debt. The firm said it plans to launch a fund for institutional investors in the third quarter of 2021 focused on Australian and New Zealand real estate debt opportunities.

Essentials

Did someone say bank loans?
Who needs bank loans when you can buy risk-free treasuries? While banks’ residential mortgage balances dropped $8.6 billion in the third week of May, declining at an 8.4 percent annual rate over the past six months, bank-wide holdings of treasuries jumped $12 billion, continuing a trend of the previous three weeks.

That’s according to David Rosenberg, president, chief economist and strategist at Rosenberg Research & Associates. The pace of the banks’ net treasury purchases during the first three weeks of May amounts to a whopping 59 percent of annual pace. Nice work if you can get it.

SONIA meets ESG
New ground has been broken in establishing the SONIA benchmark as a potential replacement for LIBOR. With the London Interbank Offered Rate due to be phased out from the beginning of 2022, interest in other benchmarks has been growing.

Now Aviva Investors and BNP Paribas have jointly completed an ESG-linked SONIA interest rate swap repack for Associated British Ports, believed to be the first transaction of its kind and coupling the interest rate to key performance indicators linked to sustainability.

ABP will receive a discount on its hedging rate provided it meets ESG KPIs that include a significant reduction in emissions by 2030.

LP watch

Institution: International Finance Corporation
Headquarters: Washington, DC
AUM: $56.63 billion

International Finance Corporation has committed $100 million to Cerberus Emerging Market Special Situations Fund. The vehicle is managed by Cerberus Capital Management, and will invest in credit opportunities in different asset types such as NPL pools, senior and subordinated debt lending for real estate backed transactions and corporate credits, in Latin America and the Caribbean.

Institution: Korean Teachers’ Credit Union (KTCU)
Headquarters: Seoul, South Korea
AUM: 36.69 trillion Korean won
Allocation to alternatives: 56.4%

Korean Teachers’ Credit Union (KTCU) has committed £100 million ($141 million; €116 million) to GreenOak UK Secured Lending Fund III, a contact at the pension confirmed to Private Debt Investor. The vehicle is managed by BentallGreenOak.

KTCU’s recent private debt commitments have been primarily to North American and Western European vehicles focused on the real estate sector. The South Korean pension allocates 56.4 percent of its full investment portfolio to alternative investments.


Today’s letter was prepared by Andy Thomson with John BakieRobin Blumenthal and Adalla Kim.