Loan Note: Oaktree’s predictions for rest of 2020; Partners reveals debt performance in H1

Oaktree pinpoints opportunity and risk in the market. Plus, Partners Group provides a performance update and data show lower leverage in German deals. Here's today's brief for our valued subscribers only.

They said it

“So far as carried interest and management equity are concerned, the boundary between income and capital is conceptually drawn in the right place.”

No change, please: The British Private Equity & Venture Capital Association makes a succinct statement on the tax treatment of carried interest.

First Look

Oaktree’s view of the future

So what’s the outlook for private credit through the rest of 2020? Plenty of useful insights can be found in fund manager Oaktree Capital’s Performing Credit Quarterly 2Q 2020 report (see here). Here’s a few of the highlights:

Opportunity: “Compelling investment opportunities may be even more plentiful in 2H 2020,” says the report. Those with dry powder are finding an improved environment for lending. Oaktree says it is maintaining a conservative approach, focusing on areas that should be resilient in a downturn, and also hints that the traditional bias to financial sponsor deals in Europe may be worth re-examining given the demand for flexible finance in other parts of the market.

Risk: Company fundamentals remain a concern with the prospect that temporary payroll cuts may become permanent. This could prolong high unemployment rates and impact consumer spending.

Wildcard: The US presidential election in November “adds even more uncertainty to investors’ growing lists of concerns”.

As well as private credit in general, the report also delves into prospects for senior loans, emerging market debt and structured credit. Well worth a browse.

Partners Group reflects on H1 

Partners Group, the Switzerland-based private markets firm, unveiled its H1 2020 interim report this week. Among the highlights:

The private debt portfolio was described as resilient overall. It said: “We only had a limited number of credits that will require more substantial restructuring, incurring a modest level of aggregated impairments relative to our firm’s overall private debt AUM of $22 billion.”

The firm said it has “negligible” energy exposure and was “substantially underweight” in the challenged leisure, retail and transport sectors. Its collateralised loan obligations had not experienced any over-collateralisation test breaches.

At -4.1 percent, the direct lending portfolio underperformed its reference index (-3.9 percent) in the six-month period ending 30 June, 2020. Liquid loans delivered -3.7 percent compared with the reference index’s -4.2 percent.

Partners invested $700 million in corporate debt in the first half of the year, representing 17 percent of the $4.3 billion invested across private markets. Deal activity was well down in the second quarter as the firm focused on its portfolio more than new deals. Last year the firm invested $14.8 billion in private markets and, in 2018, $19.3 billion.

Data snapshot

Going down the gears. Both banks and debt funds in Germany have slightly lowered their leverage multiples. More than half of banks are now offering leverage at levels of 0.5x less than pre-covid as are more than 40 percent of debt funds, according to GCA Altium, in a survey of the European mid-cap financing market (see here).


Bain finalises Virgin Australia deal 

Creditors of Virgin Australia voted in favour of Bain Capital’s restructuring deal during the second meeting of creditors on 4 September, according to a statement from the airline. Deloitte is the administrator.

Boston-headquartered Bain’s proposal to the creditors included 10 separate deeds of company arrangement, the legal contracts governing a company and its creditors’ relations after the end of the company’s voluntary administration.

Virgin Australia’s unsecured creditors will get between nine and 13 cents in the dollar on their claims, the statement showed. Other details of the agreements include Bain’s interim funding to the company from 1 July.

Read more about it here.

Canada’s OTPP backs India fund

Edelweiss Alternative Asset Advisors is to wrap up fundraising as Ontario Teachers’ Pension Plan backs its latest India private debt fund. OTPP, the Toronto-headquartered pension fund administrator, has decided to commit a total of $350 million to Edelweiss’ private credit strategy.

EAAA, the alternative investment fund manager, has reached $3.8 billion in assets under management, including the commitment from Ontario Teachers, according to a spokesperson for Edelweiss Group’s investment arm.

The manager has two private debt fund series: Edelweiss India Special Asset Fund, which invests in special situations and distressed debt opportunities, and Edelweiss Special Opportunity Fund, which targets performing credit investments across the corporate and real estate sectors.

Read more about it here.

LP Watch

Institution: Cathay Life Insurance
Headquarters: Taipei, Taiwan
AUM: NT$6.49 trillion
Allocation to alternatives: n/a

Cathay Life Insurance has agreed to commit $80 million to Ares Capital Europe V. The fund is seeking to raise €9 billion.

The Taiwanese insurer’s recent commitments are to vehicles focused on the real estate and corporate sectors in the North America and Europe regions.

Today’s letter was prepared by Andy Thomson with John BakieRobin Blumenthal and Adalla Kim.

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