Loan Note: Defaults set for modest rise; ACC to help raise trade finance profile

They said it

“As default rates rise, recovery levels could fall too, because a rush of defaults would set off fire sales and increase supply of distressed assets, therefore reducing their price”

Hugo Thomas, head of credit analysis at Sienna Private Credit, in a market commentary published by the firm

First look

Increasing stress: Headwinds pushing up Europe’s default rate (Source: Getty)

Europe’s default rate heads for 3%
Default rates in Europe are on the up, according to an article (login required) from S&P Global Ratings’ Research and Insights team.

S&P said it expects the 12-month trailing speculative-grade corporate default rate in the region to rise from 2.2 percent at the end of last year to 3.25 percent at the end of this year.

Headwinds noted by the ratings agency include: economic growth stalling in the eurozone, with a recession likely in the UK; corporate profits cooling; and interest rates remaining high, with the European Central Bank expected to raise the deposit rate to 3 percent.

However, some tailwinds are also observed: energy costs have fallen from their highs at the end of last year, easing economic disruption and helping consumer confidence; headline inflation has been falling consistently in recent months; and corporate bond yields and spreads have declined as bond investors have responded to price reductions with optimism.

“We believe this combination of factors will result in a rise in defaults this year, but not a large increase,” said S&P.

ACC to boost profile of trade finance
A global trade finance working group has been formed to work on initiatives with the Alternative Credit Council in an attempt to raise awareness of trade finance among investors and support its further development (see here).

Trade finance is seen as a growth area for alternative lenders, with many global managers basing their activities out of Singapore. The working group will aim to boost the role of lenders in a sector that is seen as potentially a major growth area.

“This is an opportune time to discuss the merits of a well-executed trade finance strategy in an investor portfolio,” says Sammy Fong, chief executive officer of Singapore-based private debt manager EASTvine Capital.

“While there is an increasing demand for alternative trade finance given the reduction of financing from traditional lenders, the current financial market conditions are also encouraging investors to look beyond the traditional investment opportunity set,” Fong said.

Amundi launches second RE debt fund
Amundi, the French asset manager, has launched its second real estate debt fund – Amundi Commercial Real Estate Loans II – having already raised €150 million in capital.

The fund, which has a final target of €600 million, follows the first fund in the series, ACREL I, which raised €443 million from European institutional investors. The successor has a target net internal rate of return of more than 5 percent.

Fund II will invest in the eurozone’s major economies with a focus on premium office space, logistics and managed residential properties. The firm added that it will target property-backed debt with core or core-plus risk profiles with a value-add component as an additional performance lever.

An Article 8 fund under the Sustainable Finance Disclosure Regulation, the vehicle “will take greater consideration of non-financial criteria” through a rating based on proprietary methodology and “will place a particular value on green financing”. 


Five tips for European leveraged finance
“Hitting the brakes” is how a new report from law firm White & Case described the European leveraged finance market in 2022, as leveraged loan issuance fell by 37 percent compared with the previous year and high-yield bond activity plummeted 66 percent.

The report predicts five factors that will characterise this year:

1. Amend and extend: With refinancing effectively off the table, borrowers with credits approaching maturity will look to amend and extend their existing debt tranches. Deals will typically offer lenders a consent fee and higher coupon in exchange for extending maturities by one to two years.

2. Mid-market deals to dominate: Inertia in the syndicated loan and high-yield bond markets makes it challenging for private equity firms to finance mega-deals. But mid-market M&A financing – mainly provided by direct lenders – remains available and will sustain mid-market deal volumes.

3. Secondary market will drive primary market: European leveraged loans were pricing at an 11 percent discount to face value in the secondary markets in September and October, compared with less than 2 percent at the start of the year. Until discounts narrow, the prospect of a revival in primary markets is slim as the secondary market will remain more attractive.

4. Restructurings loom: Amend and extend will only be made available for favoured deals, where there is a real prospect of portfolio companies returning to growth in the medium to long term. Distressed debt funds are raising new pools of capital to buy up discounted debt.

5. Sponsors will hold the line on terms: There are no signs of a major change in terms and documentation as borrowers concede higher borrowing costs but not a return to “old school” documentation. Covenant-lite structures and flexible terms are here to stay.

Fourth mezz fund closed by Africa’s Vantage
Vantage Capital, the African mezzanine fund manager, has announced a final close on its fourth mezzanine fund. The fund collected $377 million of commitments from European and US-based commercial investors, as well as development finance institutions including the International Finance Corporation, DEG and the European Investment Bank.

As with predecessor funds, Vantage will provide mid-sized African businesses with capital for business expansion and job creation. Sectors of interest include telecoms, healthcare, education, real estate, export manufacturing, outsourced services and selective infrastructure such as private power generation.

Since 2006, Vantage Capital’s mezzanine division has made 33 investments across four funds in 11 African countries. Its inaugural mezzanine fund was raised in 2006, with $150 million invested into five South African companies. In 2012, the second mezzanine fund of $240 million was raised, investing into a portfolio of 13 companies across Africa. This was followed by the third mezzanine fund of $287 million raised in 2015, with a further 13 investments spread across the continent.

Duo leave Cheyne for Fiera
Fiera Real Estate UK, an affiliate of Canadian investment manager Fiera Capital, has hired Richard Howe and David Renshaw from fund manager Cheyne Capital to set up and run a pan-European real estate debt strategy. The new strategy has secured £250 million (€281 million; $301 million) in seed commitments.

The key driver behind the launch of the strategy is to broaden the product offering available to FRE’s investors by giving them the ability to take advantage of the growing funding gap in European real estate private credit.

Howe and Renshaw worked together in the real estate debt team at Cheyne Capital for five years. Prior to this, Howe held positions at Chenavari Investment Managers, Lloyds and Anglo Irish Bank, while Renshaw worked at Grainger, Kintyre Investments and Lloyds Banking Group. They have over 30 years’ combined experience and have collectively been responsible for originating and underwriting over £2 billion of pan-European debt and equity investments in their careers.

The debt strategy will have a remit to invest across multiple asset classes, including residential, logistics, offices, leisure assets and hotels, and will initially be focused on the UK market before expanding into select European markets.

LP watch

Institution: Kern County Employees Retirement Association
Headquarters: Bakersfield, US
AUM: $5.2 billion
Allocation to private debt: 4.7%

Kern County Employees Retirement Association has announced its private markets pacing plan in its latest board meeting materials.

The pension fund, based in Bakersfield, California, has a 15 percent long-term target allocation for private markets. The target allocation for private debt is 5 percent, with the remaining 10 percent equally divided between private equity and private real estate. They are currently under allocated by 0.3 percent, as their private debt exposure stands at 4.7 percent.

KCERA announced its private credit commitment pacing plan for 2023 and 2024, which would be around $85 million in commitments for the year 2023 and the same for 2024.

The firm also announced its target allocation for strategies within its private debt portfolio. It is targeting 0-15 percent for distressed debt, 40-70 percent for opportunistic and 30-60 percent in senior secured lending.

The pension fund’s recent commitments have predominantly focused on corporate debt in the North American region.

Today’s letter was prepared by Andy Thomson with John Bakie, Christopher Faille and Robin Blumenthal