Loan Note: Defaults on the decline; Senior debt is the strategy of choice for LPs

After a steep rise, company defaults appear to be dropping as companies show some welcome resilience in the face of the pandemic. Also, the latest fundraising data show more investors clamouring for senior debt, while Macquarie launches a new infrastructure strategy. Here's today's brief for our valued subscribers only. 

They said it

“The uncertainty will make the UK and international investors already invested in UK-based financial assets increasingly nervous.”

Nigel Green, chief executive and founder of independent financial advisor deVere Group, in a press release responding to prime minister Boris Johnson putting the UK on notice for a no-deal Brexit

First Look

Going in the right direction: things are looking up on the default front

The fightback starts here

Crisis, what crisis? When asked what the outlook is for private debt managers and their portfolio companies, market sources will invariably point to the default rate. If a key survey out last Friday is anything to go by, the asset class can rest easy – at least for now.

The Q3 Private Credit Default Index, published by law firm Proskauer, discovered that the US’s default rate for the third quarter was 4.2 percent – just over half the 8.1 percent recorded in the second quarter and also less than the first quarter’s 5.9 percent. (See Data Snapshot below.)

“The return of the index to the levels that we saw in the spring really speaks to the resilience we are seeing in the market. After a few slow months, the market has come roaring back, and we expect [that] will continue through the fourth quarter,” said Stephen Boyko, co-chair of Proskauer’s corporate department and private credit group.

For companies with more than $50 million of EBITDA, the third-quarter rate was 2.8 percent, compared with 5.3 percent in Q2; while, for companies with EBITDA between $25 million and $49.9 million, there was a smaller drop to 5.1 percent from 6.7 percent.

The index tracks 642 active senior secured and unitranche loans in the US representing $121.5 billion in original principal amount.

It’s a time for less risk…

The fundraising figures are in and they’re far from a disaster, with private debt funds having accumulated $109.8 billion globally during the first nine months of the year (see our full analysis here). While this is the lowest figure for the first three quarters since 2016, it’s a decent effort considering the backdrop of a global pandemic.

Notably, limited partners appear to be gravitating towards the perceived safe haven of senior debt, which accounted for 37 percent of all funds raised in the first three quarters of this year – compared with 29 percent in the equivalent period of 2019. Distressed debt fundraising has been muted in 2020, with distressed funds currently in deployment mode having raised most of their capital prior to this year.

…Or is it? 

Macquarie Infrastructure Debt Investment Solutions has decided to go up the risk curve with a new strategy targeting sub-investment grade infrastructure debt.

“Institutional investors have increased their allocations to sub-investment grade infrastructure debt in recent years, recognising the typically stable nature of infrastructure asset revenue streams and strong protections in place for lenders when compared with similarly rated corporate debt,” said the firm.

Courtesy of our colleagues on Infrastructure Investor, more can be read about the strategy’s launch here.

Data snapshot

Defaults dropping. Proskauer’s Q3 Credit Default Index shows more companies fighting their way through difficulties now than earlier in the year.

Essentials

First Eagle closes latest CLO

Boston-based First Eagle Alternative Credit, an alternative credit manager with $21 billion of assets under management, has closed Lake Shore MM CLO III on $318 million. The offering represents First Eagle’s third collateralised loan obligation that includes mid-market leveraged loans.

With the completion of the deal, First Eagle and its affiliates will manage 40 CLOs totalling approximately $17 billion in AUM. The previous mid-market CLO offerings, THL Credit Lake Shore CLO II and THL Credit Lake Shore I, closed in September 2019 at $306 million and in April 2019 at $411 million, respectively.

Indigo part of Alantra expansion plans

International asset manager and credit advisory firm Alantra has acquired a minority stake in Paris-based private debt fund manager Indigo Capital.

The completed deal sees Alantra take a 49 percent stake in the firm as part of its plans to build a diversified pan-European asset management business.

Read more about the deal here.

LP Watch

Institution: San Francisco Employees’ Retirement System
Headquarters: San Francisco, US
AUM: $28.2bn
Allocation to alternatives: 26.8%

San Francisco Employees’ Retirement System has committed to a private credit fund from Blue Torch Capital, according to an October 2020 investment report from chief investment officer William Coaker.

The pension invested $50 million in Blue Torch Credit Opportunities Fund II, which is targeting $1 billion and focuses on the corporate sector in North America.

Other highlights from SFERS’ annual investment plan:

Private credit posted a 4.69 percent return in Q3 due to a partial economic recovery, according to the investment document. The private credit asset class is up 0.58 percent year-to-date.

SFERS has committed $500 million to private credit in 2020. The system has made over $1.6 billion in private market commitments this year.

SFERS plans to be carbon neutral by 2050 as part of its updated ESG policy, according to the report.

At its November board meeting, SFERS plans to review an updated strategic asset allocation recommendation.


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

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