Loan Note: KBRA thinks asset class can overcome challenges; lenders become football fans

They said it

“The path for inflation beyond the near term is uncertain, and the risks around the modal projection are judged to remain skewed significantly to the upside” 

Taken from a statement from the Bank of England following the UK’s latest quarter-point interest rate rise to 4.5%

First look

Dodging the dangers: stresses appearing, but mid-market leverage is low (Source: Getty)

Credit stress real but manageable
The Kroll Bond Rating Agency has released a precis of the annual Private Credit Industry Conference on Direct Lending and Middle Market Finance, a meeting hosted by the Loan Syndications and Trading Association and DealCatalyst in Fort Lauderdale, Florida, late last month.

There were two major themes expressed by the various panels at the conference. First was the acknowledgement that the direct lending industry in the mid-market will face credit stresses in the months ahead. The meeting took place days before the latest Federal Reserve meeting, on Wednesday, 3 May 2023, which on the one hand raised the target rate by another 25 basis points but on the other hand signalled that the Fed believes it is nearing a point to pause its anti-inflation campaign.

Several panellists said (as paraphrased by KBRA) that “the current level of rates will ultimately slow top-line growth and contract EBITDA margins” to a degree that has not yet shown up in portfolios. Furthermore, regulatory proposals recently enacted (such as the new Private Fund Advisor Rule from the SEC), or under consideration, could add cost and uncertainty and strengthen the force of headwinds the industry will face in the second half of this year.

Nonetheless, the second theme is that the headwinds can be overcome. One reason for confidence is that mid-market leverage is low in comparison to levels in the market for broadly syndicated loans.

Though much of the focus was on the US, panellists also looked to Europe. “The number of deals in Europe tends to outpace the US,” KBRA summarised, “but deals tend to be smaller”.

Lenders take to the football pitch
As a topic of conversation, there’s always a decent chance that football will be discussed on the sidelines of a conference: perhaps in a coffee break or over evening cocktails. It was arguably more of a surprise that it made its way onto the plenary stage at the PDI Europe Summit 2023.

“Sports has not been a traditional focus of lenders,” said one panellist. But he said the potential was “very big” with €80 billion to €100 billion of value in just the top 20 football clubs in mainland Europe.

Such clubs have tended to be owned by wealthy individuals and funded through equity but, starting in the covid period, these traditional sources of capital have retrenched and a capital gap has become apparent.

“These are assets with great value over the long term, track records that go back a very long way, which have great revenues and have often been mismanaged. It’s also a defensive industry in a down cycle,” noted the panellist.

US pensions confident about inflation hedging
US public sector pension plan managers are confident their plans are well hedged against inflation but still have worries about possible risk scenarios, research from Ortec Finance, the provider of risk and return management solutions for pension funds and other institutions, shows.

The study of professionals collectively managing over $1.3 trillion found 86 percent say their plan is well hedged against inflation, with more than a quarter (26 percent) believing their plan is ‘very well’ hedged. The research found just 12 percent believe hedging at their plan is average.

The confidence in inflation hedging is not leading to complacency though, with managers still active in changing asset allocations to hedge against inflation. Two-thirds (66 percent) think they will increase allocations to commodities to help with this, while 50 percent will boost allocation to infrastructure. Some 32 percent will increase allocations to inflation-linked bonds and 38 percent to gold.

Managers still have concerns about the risk of stagflation – the combination of low growth and high inflation – for their investment strategies. Some 48 percent said they were very concerned while 50 percent were quite concerned.


BBI adds more capital to Apera SMA
British Business Investments, the British Business Bank subsidiary, has committed a further £30 million ($38 million; €34 million) to a separately managed account with fund manager Apera Asset Management. The SMA is now worth £80 million following an earlier BBI commitment of £50 million.

Although London-based Apera invests across Europe, the SMA is focused only on the UK market. It has so far invested just over £48 million in 15 companies.

Since it was founded in 2016, Apera has backed 58 high-growth businesses worth an aggregate €2.3 billion. In July last year the firm closed its second private debt fund on €1.27 billion, beating an €800 million target. The firm’s first fund closed in February 2019 on €750 million.

New hire for Beechbrook
Beechbrook Capital, the London-based SME-focused private debt manager, has appointed Jon Milnes as fund performance director. He will help lead the portfolio management activity of Beechbrook as it continues to increase its regional footprint across the UK and Northern Europe.

Milnes has over 35 years of commercial banking credit and relationship management experience with Lloyds Banking Group. At Lloyds, he spent much of his time leading regional SME and mid-market restructuring activity for the group. Prior to this, he was in the bank’s structured finance team originating and managing strategy for leveraged transactions.

Beechbrook held a second close on its third UK SME credit fund in November last year on £170 million. The fund is seeking up to £300 million.

LP watch

Institution: Stanislaus County Employees Retirement Association
Headquarters: Modesto, US
AUM: $2.61 billion
Allocation to private debt: 8%

Stanislaus County Employees Retirement Association (StanCERA) has approved a commitment of $20 million to Callodine Asset Based Loan Fund II (CABL II), according to the pension fund’s recent meeting materials.

The fund, CABL II, is managed by Callodine Group and provides financing to a diverse range of sectors, with loans secured by collateral types including real estate, inventory and equipment. Callodine is based in Boston and manages $2.5 billion in assets.

The pension fund has a target allocation of 8 percent to private credit and has a sub-asset class target allocation of 5 percent to direct lending and 3 percent to special situations. This commitment to CABL II has been included in the direct lending allocation of StanCERA.

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