Loan Note: Defaults still loom in consumer sector; CIP preps renewables debt offering

The consumer sector is showing hints of improvement but is still first in line for defaults. Plus: the fund manager launching a renewables debt strategy and a new platform for KKR. Here's today's brief for our valued subscribers only.

They said it

“The powerful economic restart is broadening, with Europe and other major economies catching up with the US. We expect a higher inflation regime in the medium term – with a more muted monetary response than in the past.”

Taken from the BlackRock Investment Institute’s weekly market commentary.

First look

Consumer firms hover close to covenant breaches
If you’re looking for the sector with the most likely defaults, it appears you should look no further than the consumer sector. However, according to the latest research from investment bank Lincoln International, which covers the UK and Europe, there are some signs of an improving situation.

According to Lincoln, the headroom available for consumer businesses in their leverage covenants stands at 8 percent. This is an improvement on the 4 percent recorded in the first quarter of this year but is still considerably below the 18 percent recorded in the second quarter of 2020 and is a much lower figure than that found in other sectors.

EBITDA leverage in the consumer sector also remains high at 6.5x, compared with the average of 5.4x across all other sectors measured by the research. However, it is slightly below the 6.7x leverage recorded in the first quarter.

“Whilst there has been improvement in the performance of some consumer companies in the UK and Europe, trading conditions are still tough for the sector as we emerge from the pandemic,” says Richard Olson, managing director of Lincoln’s London valuations and opinions group. “The gap before hitting their covenants remains tight for many consumer businesses.”

CIP eyes debt as next offering
Copenhagen Infrastructure Partners has not been short of milestones this year, according to our colleagues at Infrastructure Investor. In April, it raised the largest-ever greenfield renewable energy fund with the €7 billion close of CIP IV, while last week it raised $2.3 billion from nine banks to finance its 800MW Vineyard 1, the first large-scale offshore wind project to reach financial close in the US.

Now the debt raiser is set to turn debt provider, as the manager prepares to launch Green Credit Fund I, its first debt vehicle targeting energy transition assets. The firm has also appointed Daniele Tabacco and Sameer Thanawala, in London and New York, respectively, to focus on origination.

A target is not yet known for the vehicle, though if the $1 billion raised in December 2019 for CIP’s inaugural New Markets Fund is anything to go by, it’s unlikely to be small change.

Essentials

New net lease platform for KKR
KKR has announced the formation of Strategic Lease Partners, a new platform to invest in a diversified portfolio of triple-net lease real estate. KKR’s investment, primarily from its credit and real estate funds, will enable the platform to acquire more than $3 billion in assets.

Veteran net lease investors Andrés Dallal and Joseph Mastrocola will join SLP as partners, working with KKR’s real estate, credit and capital markets teams to acquire triple-net properties and deliver sale-leaseback solutions to corporate tenants.

Dallal and Mastrocola were previously executive directors at WP Carey, where they were responsible for sourcing, evaluating, negotiating and structuring net lease investments in North America.

Korean pension targets private debt
Private debt is part of a new alternative strategy and investment team being launched by National Pension Service of Korea (see Korea Economic Daily report here, sign in required). Secondaries deals and equity purchases of asset managers are also part of the investment team. NPS is the world’s third-largest pension scheme.

Singapore hire for Equities First
Equities First Holdings, the US-headquartered asset-based financier, has appointed Johnny Heng as managing director and head of Singapore, where he will lead the firm’s origination strategies and report to Gordon Crosbie-Walsh, chief executive officer for Asia. Heng was most recently chief client officer at Nomura Wealth Management, overseeing key client relationships.

LP watch

Institution: Virginia Retirement System
Headquarters: Richmond, US
AUM: $101.8 billion
Allocation to alternatives: 24.2%

Virginia Retirement System confirmed $552.9 million in commitments across two private debt vehicles at its August 2021 investment advisory committee meeting. The firm committed $250 million to Audax Direct Lending Solution II and $352.9 million to ICG Europe VIII.

Intermediate Capital Group’s eighth fund has been in market since May this year and is targeting $8.2 billion. Audax Group’s second direct lending solution launched in June this year, following the final close of its predecessor at $1.65 billion in January 2019.

VRS’s private debt portfolio is housed within its credit strategies asset class, which makes up 14 percent of the pension’s full portfolio offering.

VRS’ recent private debt commitments have tended to target subordinate/mezzanine funds focusing on lending within North America or globally.


Today’s letter was prepared by Andy Thomson with John BakieRobin Blumenthal and Michael Haley.

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