Loan Note: Pressures on leveraged loans likely to increase default rate; infra fundraising making good progress

Leveraged finance default rate set to rise further in 2024. Plus: Infranity makes progress on its latest infrastructure senior debt fund; and a UK/US tie-up between DRC Savills and Quadrant. Here’s today’s brief for our valued subscribers only.

They said it

“Alternative fund managers’ risk appetite is set to expand over the next 12 months as companies focus on acquisition opportunities amid expectations that inflation and interest rates will fall” 

Taken from new research by Ocorian, a provider of services to financial institutions, real asset managers, corporates and high-net-worth individuals

First look

High pressure: interest costs and macroeconomic challenges in the leveraged finance market (Source: Getty)

Tough times ahead for leveraged financeA deteriorating outlook for leveraged finance in both the US and Europe has been identified by Fitch Ratings in a report.

The rating agency said default rates climbed last year and will continue to do so this year in the face of high interest cost burdens and macroeconomic pressures.

High interest expenses, it said, would weigh heavily on highly leveraged companies that may already be operationally challenged, generating low or negative free cashflow and unable to organically grow EBITDA to offset interest rate increases.

The rise in defaults, Fitch said, is likely to be driven by sector-specific issues in healthcare and pharmaceuticals, telecoms and technology.

Fitch expects default rates for leveraged loans to rise to 4 percent in 2024 from 3 percent last year as highly leveraged credits remain vulnerable to approaching maturities.

Of the 11 percent of European leveraged loans maturing in 2025, 97 percent are rated in the ‘B’ category or below.

Infranity launches fourth senior debt fundEuropean infrastructure manager Infranity is off to a good start for its fourth senior debt strategy, raising €425 million against a target of €1.5 billion, our colleagues at Infrastructure Investor reported, based on a statement.

The Article 8 vehicle already has five assets in its sights, worth some €250 million in investments, to be clinched by the year-end, the Generali Investments affiliate pointed out.

“Our transaction pipeline is extremely healthy, particularly in the growth segments of energy transition, green mobility and telecoms, allowing the construction of well diversified portfolios with strong sustainability credentials,” head of investment debt Sacha Kamp stated.

Kamp added: “Higher spreads and a lender-friendly market environment will be supportive of delivering attractive risk/return.”

Fund IV is targeting the same amount as Infranity’s third vintage, though the latter managed to beat its target to close on €1.6 billion last summer. Overall, Paris-based Infranity manages circa €9 billion of assets as at 15 November 2023.

Join us in Singapore!We know you wouldn’t want to miss out, so we feel now is an appropriate time to remind our readers of this year’s APAC Forum on 27-28 March 2024 at the Sands Expo and Convention Centre in Singapore – details here.

The event has benefitted from having an advisory board made up of leading professionals in the region. Among them is Elizabeth Kumaru, head of private corporate assets at Australian Retirement Trust, a Brisbane-based LP. She shared with Loan Note her thoughts on the market:

How would you describe the private debt market currently?EK: Current market conditions have led to a reduction of traditional debt capital sources providing loans, such that private debt lenders have been able to access higher-quality assets at higher interest rates and spreads whilst also having lower leverage levels and tighter documentation. This is beneficial for investors with capital to deploy.

However, existing private debt portfolios may feel some pressure as interest rates remain above recent historical lows. The higher cost of capital has weakened credit fundamentals, particularly interest coverage metrics which is expected to result in increased default rates. This pressure on borrowers, combined with an uncertain macroeconomic environment, will likely result in increased dispersion in return outcomes within the private debt market and private debt investment manager universe.

How would you predict private debt market growth and opportunities in the next two years? Where do you see the best opportunities in the private debt space?

EK: The private debt market has continued to grow rapidly in recent years as traditional lenders have pulled back and private debt has proven to be a reliable and attractive alternative source of financing. While public credit markets are bound to return and take market share back from private debt, the expectation is that the asset class will continue to grow over time and be a larger proportion of the debt financing markets.

Going forward we see potential for good investment opportunities in direct lending to high-quality assets and companies, particularly while debt market supply and demand dynamics remain favourable and yields on private senior loans remain at or near historical highs. There is also the possibility that a prolonged period of higher rates may lead to an increase in distressed and special situations activity (rescue financings, loan to own, restructurings etc).

Essentials

Ready player one

London-based alternative lender DRC Savills Investment Management last week expanded its commercial real estate debt platform to the US via a joint venture with Atlanta-based Quadrant Real Estate Advisors, according to our colleagues at Real Estate Capital. The firm, which manages debt investments in the UK, Continental Europe and Australia, sees the US as the next logical place for expansion.

“It is an interesting time to enter the US markets because the size and speed of the interest rate rises and the adjustment in capital values is creating an opportunity for non-bank capital, even in the US where there is a more balanced system of providers,” Dale Lattanzio, managing partner, told Real Estate Capital USA.

DRC Savills IM, which has about £2 billion ($2.5 billion; €2.3 billion) in assets under management in a portfolio that includes senior debt, high yield and whole loan products, will be the joint venture’s majority owner.

Alternative credit hire for Ares

Ares Management has appointed Stefano Questa as partner and co-head of Europe for alternative credit. The other co-head is Eli Appelbaum.

Questa has over 21 years’ experience, previously serving as partner and portfolio manager for private credit at Hayfin Capital Management where he invested across special situations strategies and was responsible for the firm’s asset investing activities.

Earlier in his career, he was a managing director at Sixth Street Partners, where he was responsible for real estate and asset-backed special situations in Europe. He also worked at Goldman Sachs for over ten years in its investment banking and principal investing divisions.

Ares’ alternative credit strategy is one of the largest investors in asset-based credit with approximately $32.1 billion in assets under management as of 30 September 2023. The team provides solutions for owners of large, diversified portfolios of assets seeking to generate resilient, contractual cashflows across market cycles.

In October 2023, Will Farrant and Ruby Lau joined Ares to lead the alternative credit team’s efforts in Australia and New Zealand.

IFC supports ADM smart city fund

The International Finance Corporation has made a $60 million commitment to ADM Capital’s $300 million-target smart city emerging Asia fund.

The fund is the third in a series of ADM Capital emerging market-focused funds, known as ADM Asia Secured Lending Funds, the first of which launched in 2012.

The third vintage has a thematic focus on smart cities and is ADM’s first such fund, and also thought to be the first emerging market Asia private debt fund to be fully focused on a smart city thematic.

The fund aims to support the development of smart cities to enable a smooth transition to urbanisation across emerging Asia, reducing strain on resources and supporting the delivery of more efficient, competitive, sustainable economies through technology and innovation.

Eligible countries include Bangladesh, Cambodia, China, India, Indonesia, Malaysia, Mongolia, Nepal, Philippines, Sri Lanka, Thailand and Vietnam.

ADM Capital has invested approximately $2 billion in emerging markets since 2012 across its strategies.

IFC is a long-term partner of ADM Capital, and this is its largest anchor commitment to date. It invested in the first two emerging market vintages ($50 million in ASLF 1 in 2012 and $44.5 million in ASLF II in 2016).

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LP watch

Institution: Arizona State Retirement System
Headquarters: Phoenix, US
AUM: $50.7 billion
Allocation to private debt: 23.9%

Arizona State Retirement System (ASRS) anticipates a decline in the overall credit percentage of the total fund for the fiscal year 2024-25. However, it predicts that the proportion of private credit will remain unchanged during this period (about 16 percent). It is projecting $950 million of new net commitments in 2024.

Platinum subscribers may click here for the investor’s full profile, including key contacts, allocation strategy and fund investments.


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