Loan Note: Inflation back on the agenda; defaults rising in US

Could we be entering a new inflationary era? At the very least, it is a topic of conversation again. Plus, US defaults to increase but fall below GFC levels and CALCAP launches a new multifamily lending platform. Here's today's brief for our valued subscribers only.

She said it

“Concerns are mounting as to whether financial markets may have entered bubble territory over the past few weeks. Certainly, instances of excessive behaviour in markets have become apparent and, it seems, more frequent.”

Taken from a commentary by Frédérique Carrier, head of investment strategy at RBC Wealth Management.

First look

Inflation is back on the agenda
“Watch out, the inflation monster is back” declares a new piece of analysis from ING, which points out that German inflation in January came in at 1.0 percent year-on-year from minus 0.3 percent in December. Although 1 percent does not sound overly dramatic, ING warns that: “Looking ahead, today’s inflation number is just the beginning of a period of significantly higher headline inflation in Germany.” ING expects headline inflation in the country to move above 2.0 percent in the summer.

Should the monster end up being roused from its slumber, prospects will change – whether for better or worse – for many types of investment. One example: inflation, or the risk of it, has in the past proved beneficial for floating-rate loans, the value of which are protected even if interest rates rise.

Coming out of an environment that has been anything but inflationary, it is tempting to be dismissive. Some may feel such fears are being stoked, including by politicians who view fiscal aid arising from the pandemic as having gone too far. However, it is surely significant that inflation has edged its way back into the conversation. BlackRock Investment Institute’s Weekly Commentary delves into the topic amid the claim that “markets are waking up to inflation”. It may be a long-running conversation.

Defaults to rise, but peak below GFC
In its US Leveraged Finance Q4 2020 Update S&P Global says it expects the continued search for yield to support demand for leveraged loans and high-yield bonds in 2021. It is also forecasting a rising default rate that nonetheless peaks below the levels during the last financial crisis.

The share of entities rated B- by S&P, already on the rise prior to the pandemic, peaked last year and, the ratings agency thinks, will likely remain elevated. But how things play out depends on two factors: the trajectory of the economic recovery and the sustainability of investor optimism.

S&P says a few sectors that rapidly fell out of favour last year are turning the corner, supported by hopes for rapid global inoculation against the coronavirus. For others, the pandemic has accelerated long-standing transitions (for example, from movie theatres to at-home streaming), while certain sectors expect the effects of the pandemic to outlive the crisis.

Data from the first nine months of the pandemic highlight its effect on the leverage of speculative-grade corporate borrowers. The sheer size of the debt loads at these borrowers will likely pose a challenge for their credit quality even if they expand their business, says S&P.

CALCAP launches new multifamily platform
A new lending platform has been launched by Pasadena-based California Capital Real Estate Advisors. The CALCAP Strategic Opportunities platform will seek to fill a perceived financing gap in the multifamily sector, with investments of up to $7 million in workforce housing projects worth $5 million to $20 million. The platform will provide preferred equity, bridge loans and mezzanine debt. See more here.

Data snapshot

Distress in demand. Investor appetite remains high for distressed debt strategies, according to the PDI Investor Report 2020, with 38 percent of LPs saying they want to invest more in the asset class. This comes despite a fall in distressed debt fundraising during 2020. Direct lending is also popular with 35 percent of institutional investors looking to invest more in this popular strategy, at the expense of riskier strategies like venture debt and mezzanine.

Essentials

Investor Solutions hire for CIFC
CIFC Asset Management, a $30 billion alternative credit firm, has appointed Rebecca Levy as a managing director in its Investor Solutions Group. Levy was most recently a senior portfolio advisor at Aksia.

Based in New York, Levy reports to Jim Boothby, managing director and global co-head of business development. With more than 20 years’ experience across portfolio construction, strategy allocation, institutional sales and business development, Levy has served at Goldman Sachs, Barclays Capital, Lehman Brothers and UBS Investment Bank as well as Aksia.

CIFC also recently hired Tatyana Machado as executive director in the Investor Solutions Group. Machado spent almost two decades in business development and client service at AQR Capital Management and BlackRock.

Brouwer joins ICG in Amsterdam
Intermediate Capital Group has appointed Rist Brouwer as a managing director in its European subordinated debt and equity team.

Based in ICG’s Amsterdam office, Rist will cover investment opportunities in the Benelux markets across subordinated debt, equity and partnership capital. Rist’s background is in private equity, management, consulting and corporate development. He joins ICG following nine years in private equity leading European transactions for Silverfern.

BlackRock makes internal hire for wealth unit
BlackRock has appointed West Lockhart as EMEA head of BlackRock Alternatives Specialists Wealth, where he will lead the private market strategy and aim to drive the next phase of strategic growth for the business.

West brings wealth, family office and strategic partnership expertise having held prior leadership roles in EMEA Wealth, EMEA Strategic Partnership Program and Latin American distribution at BlackRock. He joined BlackRock in 2007 and became a managing director in 2010.

LP watch

Institution: International Finance Corporation
Headquarters: Washington DC, US
AUM: $56.63 billion
Allocation to alternatives: n/a

International Finance Corporation has committed $100 million to JC Flowers India Opportunities Fund. The vehicle is managed by JC Flowers and it will invest in mid-size corporates by acquiring distressed assets from banks in India.

IFC’s recent fund commitments have focused on debt-issuing and debt-purchasing strategies in Asia-Pacific, the Middle East and Africa.

Institution: Los Angeles County Employees’ Retirement Association
Headquarters: Pasadena, US
AUM: $63.85 billion
Allocation to alternatives: $25.6 billion

Los Angeles County Employees’ Retirement Association intends to expand its emerging manager programme to include illiquid credit, according to the pension’s January 2021 investment board meeting document. LACERA’s emerging manager programme already includes alternatives such as private equity and private real estate.

The illiquid credit team plans to assess the implementation strategy of the programme during the second quarter of 2021 with an expected launch date by the end of 2022. The US public pension may appoint emerging managers directly or hire a fund-of-funds manager to conduct the search.

LACERA currently allocates 2.4 percent of its full investment portfolio to private debt. The pension’s chief investment officer is Jonathan Grabel.


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

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