Loan Note: Private debt funds flock to Luxembourg; defaults are up in European leveraged finance

The view from Luxembourg, where private debt funds appear to be flourishing. Plus, red flags in the leveraged finance market and signs that deals are becoming less highly leveraged. Here's today's brief for our valued subscribers only.

They said it

“We have upgraded emerging market debt on a tactical basis as positive vaccine developments bolster the case for an accelerated global restart in 2021.”

Taken from the latest weekly market commentary from the BlackRock Investment Institute.

First look

Luxembourg paints bright picture
“Today, amidst the chaos of a global pandemic, it has not only remained resilient, but it continues to exceed expectations,” says Valeria Merkel, audit partner and co-head of private debt at KPMG, painting a positive picture of the private debt asset class.

Indeed, the latest Private Debt Survey from KPMG and The Association of the Luxembourg Fund Industry contains plenty of encouraging news. Based on private debt funds domiciled in Luxembourg, it found that they have increased assets under management by more than 36 percent in 2020 to more than €108 billion. Direct lending and senior loan strategies saw AUM increases of 7 percent and 2 percent, respectively.

The survey identified the managers of the funds as being overwhelmingly from the EU (82 percent), with 17 percent from North America and 1 percent from Central and South America.

It also revealed an increase from 8 percent in 2019 to 28 percent in 2020 of funds structured as reserved alternative investment funds. The RAIF was introduced in 2015 and was designed to make Luxembourg more attractive as a domicile. It appears to be working.

Red flags for European leveraged finance 
Research from S&P Global Ratings lays bare how hard the European leveraged finance market has been hit by covid-19. It finds that defaults and CCC holdings are up, loan supply is down and – while collateralised loan obligation managers have been adapting by trading out of weaker corporate sectors – this has sometimes come at the price of par losses.

The ratings agency warned there was still “a high degree of uncertainty” about the evolution of the pandemic, despite the announcement this week that the Pfizer vaccine had been approved for use in the UK. It said such promising developments were “merely the first step toward a return to social and economic normality”.

Debt levels heading down 
In its latest Private Markets Navigator report, Partners Group says it sees better credit documentation and lower deal leverage than before the pandemic.

The firm found that leverage levels for US buyout transactions have decreased to 5.4x in 2020, compared with 5.8 to 6.0x in previous years. Meanwhile, equity cushions have increased to a healthy 50 percent.

In today’s market, Partners says it sees relative value in large and mid-cap direct senior secured loans, particularly club-style financings where the limited number of lenders in a debt tranche increases negotiating power.

Data snapshot

Lending for longer. Private debt funds’ lifespans are increasing according to research from the Association of the Luxembourg Fund Industry and KPMG. In 2020, 59 percent of funds had a maturity of between eight and 12 years, while only 11 percent had a maturity of less than eight years. This compares to 36 percent of funds with a maturity of less than eight years in 2019.


MD for Owl Rock in London 
New York-headquartered fund manager Owl Rock Capital has hired Amy Ward as a managing director to lead its new London office. She will oversee the firm’s institutional client service and business development for the European market as Owl Rock looks to expand its client base outside of the US.

Ward was previously a partner at fund manager Pollen Street Capital, where she was responsible for fundraising and investor relations.

Certior progresses niche distress fund
Helsinki-based funds of funds manager Certior Capital has held a first close of its Certior Special Opportunities Fund on €35 million, backed by European pension funds and family offices. The fund is targeting smaller distressed opportunities and is aiming to raise €75 million in total, with a final close planned for May next year.

LP watch

Institution: Asian Infrastructure Investment Bank
Headquarters: Beijing, China
AUM: $22.63 billion
Allocation to alternatives: n/a

Asian Infrastructure Investment Bank has confirmed a $100 million commitment to ADM Capital Elkhorn Emerging Asia Renewable Energy Fund. The vehicle, which has a target size of $500 million, is managed by ADM Capital and invests in the corporate sector through a venture debt strategy across Asia.

This is the first time Asian Infrastructure Investment Bank has invested in a private debt fund.

Institution: Korea Post
Headquarters: Sejong, South Korea
AUM: 133.86 trillion Korean won
Allocation to alternatives: 6.0%

Korea Post Savings, the investment unit of Korea Post, has issued a request for proposal for overseas direct lending managers. It aims to commit a total of $200 million to two fund managers.

The successful firms should have a closed-end commingled fund of at least $500 million in size, with at least 80 percent allocation to first-lien debt including unitranche, while sector-focused funds such as real estate, infrastructure and energy are not included. The fund should also have a net internal rate of return of at least 5 percent.

The submission deadline is 15 December 2020 with a decision to be put forward to the investment committee in February 2021.

The 133.86 trillion Korean won ($121.5 billion; €100.6 billion) South Korean government agency has a 6 percent allocation to alternative investments.

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

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