Loan Note: Index launched for listed credit vehicles; loss-making corporates set to double

A new index is launched, tracking listed alternative credit vehicles. Plus, a return to the 70s may be on the cards with defaulters tipped to double and Putnam hires a trio from First Eagle. Here's today's brief for our valued subscribers only.

They said it

“It all just increases the risk that they end up having to take more severe action.”

US Republican senator Pat Toomey expresses the view that the Federal Reserve is in danger of being “behind the curve” on inflation 

First Look

The public face of private debt is launched 
It seems that private credit is well on its way to going public. That’s the premise underlying a recently introduced index, the Gapstow Liquid Alternative Credit Index, or GLACI, which is tracked by a new ETF, the Wisdom Tree Alternative Income ETF.

The index, which was launched in May, is the brainchild of Christopher Acito, chief executive officer of Gapstow Capital Partners and his team, who developed it in concert with Alerian and S-Network Global Advisors. Gapstow, founded in 2009, is an alternative credit investment adviser and manager, and Acito told Private Debt Investor that the index was a natural outgrowth of Gapstow measuring the performance of its own funds and clients. The index was created to bring diversified exposure across alternative credit in an investable, and fully liquid way, to a wider audience, he says.

GLACI tracks the share price performance of 35 publicly traded alternative credit investment vehicles, including business development companies, mortgage REITs and credit-centric closed-end funds. The components have balance sheets consisting of alternative credit investments and whose shares trade intra-day on major exchanges. The index uses a proprietary and rules-based methodology to produce a high distributable dividend, represent six alternative credit sectors and provide access to “marquee” investment firms such as BlackstoneKKR and Apollo Global Management.

The index includes the largest publicly traded alternative credit vehicles by market capitalisation and isn’t performance based. Nevertheless, the index is showing solid returns. From 6 May, when trading began, through 25 June, GLACI has risen by 4.4 percent, against a 1.8 percent increase in the S&P 500, according to Patrick Shaddow, head of index operations at Alerian and S-Network.

Back to the 70s as defaults could double
On a podcast published last week, we discussed how the wave of distressed opportunity had been pushed back by government support schemes – but that the wave could still wash ashore in 2022 or 2023. This is a view apparently supported by S&P Global Ratings, which has published a new report predicting a doubling of corporate loss-makers within two years (see here).

The report says companies have cushioned themselves against interest cost rises by pushing out debt maturities. But S&P’s stress test of more than 10,000 global corporates indicates that a twin shock of 1970s-style cost inflation together with the level of spreads seen in the global financial crisis could double potential defaulters to 12 percent by 2023.

“Although a near-term debt crisis is unlikely, our stress test found that an inflation spike and interest rate shock could see a sizeable jump in the number of borrowers facing credit stress or strain,” said Terry Chan, senior research fellow at S&P Global Ratings.

Essentials

Putnam’s 37 Capital makes triple hire
37 Capital, Putnam Investments’ alternative investments business, said three veterans formerly of First Eagle Investment Management had joined the asset manager to bolster its collateralized loan obligation and broader leveraged loan capabilities. Scott M. D’Orsi, a portfolio manager, reports directly to Putnam’s co-chief investment officer of fixed income, Michael V. Salm, and Brett S. Kozlowski, co-head of structured credit, and will work closely with Kaitlin M. May, 37 Capital’s COO. May will also become head of global institutional investment management at the end of June, when Jeffrey L. Gould retires. The other hires are analysts Eric C. Vander Mel and Stephen L. Newton. Salm said that Putnam believes that structured credit offers a “complexity premium” that can be harvested by sophisticated investment managers. Salm indicated that the new hires will join the fixed income team. Putnam manages some $30 billion in structured credit.

A green first for ICG
Describing it as “the first green loan for our senior debt programme”, by head of senior debt, David Mortimer, ICG Real Estate has completed an £86.8 million (€101.2 million; $120.8 million) senior loan secured by Reading International Business Park, a 400,000 sq ft office campus in the UK’s Thames Valley corridor. The property was acquired in December 2020 by EPISO 5, a fund advised by Tristan Capital Partners.

The transaction includes financial incentives for meeting defined sustainability targets at the property, including improvements to energy performance and enhancements to social infrastructure.

LP Watch

Institution: Connecticut Retirement Plans and Trust Funds
Headquarters: Hartford, US
AUM: $43.08bn
Allocation to private debt: 0.7%

Connecticut Retirement Plans and Trust Funds has approved its private credit pacing plan for fiscal year 2022, according to materials from the pension’s June 2021 investment advisory council meeting.

Highlights from the meeting include:

CRPTF has outlined its private credit target commitment pacing range for the 2022 fiscal year, with future commitments of between $950 million to $1.05 billion allocated to private credit vehicles. The pension’s current allocation to private debt stands at 0.7 percent of its full investment portfolio, which works out at just over $301 million in value.

CRPTF will reduce its regional exposure to North American private debt investments from its former target of 93 percent of total investments to 60-70 percent. This shiftwill create space for an increase in Western Europe and rest of the world investments from 6 percent to 20-30 percent and 1 percent to 5-10 percent, respectively.

CRPTF is intending to diversify its private debt strategy allocations by introducing a 40-50 percent target exposure to senior debt; alongside 10-20 percent to mezzanine debt and 10-20 percent to co-investments.

To accommodate these changes, CRPTF will cease investing in specific direct lending vehicles, which currently comprise 51 percent of the pension’s total private debt investment portfolio. The pension’s new senior debt target allocation will comprise the capital formerly allocated specifically to direct lending.

The pension has also considered a shift away from its fund-focused investment strategy towards a separately managed accounts-focused structure, which CRPTF believes will aid in enabling higher liquidity and increased transparency over the pension’s private debt capital commitments.

CRPTF’s private debt commitments for fiscal year 2021 focused predominantly on North American investment vehicles, largely comprising special situations and direct lending strategies. Average ticket sizes fluctuated between $50 million and $100million, though there was a peak commitment of $250 million to TSSP Adjacent Opportunities Partners in November 2020.

Other recent private debt commitments confirmed by CRPTF include $75 million to Hg Titan and $100 million to Fortress Credit Opportunities Fund V Expansion.

Institution: Santa Barbara County Employees’ Retirement System
Headquarters: Santa Barbara, US
AUM: $3.86bn
Allocation to alternatives: 26.46%

Santa Barbara County Employees’ Retirement System approved a $20 million commitment to Deerpath Capital VI, as mentioned during the pension’s June 2021 retirement board meeting.

According to retirement board documents, the fund managed by Deerpath Capital Management consists of primarily first-lien term loans to smaller, corporate borrowers in the lower middle market. It is expected to hold its first close in July.

The $3.86 billion US public pension’s private credit pacing plan, presented by investment consultant RVK, requires an annual commitment of $40 million in order to meet its 3.67 percent target allocation by 2024.

The pension’s recent private debt commitments have been to senior debt funds targeting investments in North America. SBCERS currently allocates 1.93 percent of its full investment portfolio to private debt.


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

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