Loan Note: September’s Private Debt Investor magazine hits desks; strong relative performance from US direct lending

Our September issue explores all the key issues in fund finance. Plus: US direct lending puts up a strong showing, and why maturing loans may present a challenge for the CLO market. Here's today's brief for our valued subscribers only.

They said it

“For some time we have been calling for a sector-focused permanent government-backed loan scheme which brings together both traditional and alternative lenders to guarantee the future of our [UK] SMEs

Douglas Grant, group chief executive officer at Manx Financial Group, an Isle of Man-based financial services group

First look

The big questions for fund finance: our September issue seeks answers (Source: Getty)

Fund finance in an inflationary worldAs inflation runs rife and the world teeters on the brink of recession, the fund finance industry finds itself facing an economic environment that it has never faced before. So how will both supply and demand fare in a downturn?Subscription finance’s fortunes will largely be dictated by the fundraising markets. Appetite for alternatives held up strongly through the pandemic, but the denominator effect could yet make itself felt. “Anything that lengthens fundraising cycles or reduces fund sizes will impact demand for subscription finance,” says Khizer Ahmed of Hedgewood Capital Partners, who adds that he expects lenders to pull in their advance rates to a degree.It is also possible, of course, that the banking sector will come under pressure, creating a vacuum for non-bank lenders in the subscription finance space, akin to what happened with leverage finance during the financial crisis. The returns on offer will limit appetite from funds at this end of the risk spectrum, but there are non-traditional players demonstrating some interest.To find out more about the key trends and topics within fund finance, make sure you download our newly published September 2022 issue. Within the issue you will also find thoughts on the implications of the energy crisis, why the time may be right for emerging managers, and how US fund manager Legalist grew from humble roots – plus, much else besides.

Cliffwater’s bullish view on US direct lending
A report from alternative investments firm Cliffwater looks at second-quarter trends in the US and draws optimistic conclusions on mid-market loans as a source of income through the second half of 2022.  The discussion, authored by Cliffwater chief investment officer Stephen Nesbitt and four managing directors, takes its start from a number: 0.53 percent. This is how much the Cliffwater Direct Lending Index was up in Q2. This is a small number, but a positive one. The CDLI outperformed the Q2 Bloomberg High Yield Bond Index return (-9.83 percent) and the Q2 Morningstar LSTA US Leveraged Loan Index return (-4.45 percent). That 0.53 percent also brings the trailing four-quarter CDLI total return to 7.5 percent.The CDLI is a metric for the unlevered gross-of-fees performance of US mid-market corporate loans, by way of the asset-weighted performance of the underlying assets of business development companies, given certain eligibility requirements.The second quarter saw a fall in the stock market: specifically, the S&P 500 fell more than 700 points. In mid-March, the Federal Reserve increased the Fed funds rate 25 basis points. This was a harbinger of the second quarter, which saw a 50 basis points increase in May and another 75 points in June.But CDLI fundamentals were unchanged throughout this period and the non-accrual numbers improved: falling to 1.29 percent at the end of Q2, below a long-term average of 2.12 percent. The loan assets that constitute the CDLI grew rapidly in the quarter, hitting $247 billion, up from $223 billion at the end of the first quarter at its start.Although from one point of view, high-yield bonds are performing better than private debt, the report presents a case that high-yield bonds are a value trap, not a “fundamentals-based opportunity”.  Specifically, the report says, the Bloomberg High-Yield Bond Index was offering a 55 basis point higher yield on June 30 than the CDLI three-year takeout yield.Nonetheless, mid-market loans, as measured by the CDLI, offer investors a more attractive opportunity, with a likely increase in income over the second half of the year from increases in LIBOR/SOFR and a widening of the public/private credit spread.


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Looming pressures for CLOs as loans matureA new report from S&P Global Ratings finds that almost half (48 percent) of the total par balance in European collateralised loan obligations that is rated by S&P is scheduled to mature by 2026 (see here, login required). S&P says this looming maturity wall may be detrimental to CLO credit performance and ratings given tighter refinancing conditions.The report adds that CLOs may be limited in helping to meet loan refinancing and amendment requests due to fewer refinancing opportunities for their own liabilities. With reduced lender appetite in the face of market deterioration and fears over the health of the leveraged finance market, corporate borrowers face a risk of either refinancing onto higher rates or defaulting on debt payments if no refinancing at all can be secured.Another possibility is that CLO managers may sell assets to mitigate exposure but risk incurring par losses as a result of low market prices at the time of sale.BBI support for UK agri lenderOxbury Bank, the UK agtech bank, has secured £25 million ($29 million; €29 million) in Tier 2 capital funding from British Business Investments, a wholly owned commercial subsidiary of the British Business Bank.The new funding will support Oxbury’s forecast growth in lending across the UK farm and food sector, Farmers are looking for more flexible finance to support their sector as they address the challenges of the ongoing security of the UK’s food supply and the transition to its long-term production sustainability.Oxbury says it is forecast to break even by the end of 2022. The capital facility from BBI will enable it to support additional lending of £250 million to small and medium UK businesses in 2022 and 2023.

LP watch

Institution: Teachers’ Retirement System of the State of IllinoisHeadquarters: Springfield, USAUM: $64.57 billionBitesize: $50-100m

Teachers’ Retirement System of the State of Illinois has confirmed $650 million in private debt commitments across two funds, according to its August board meeting.

Within the institution’s $15.3 billion global income portfolio, $150 million was committed to TSSP Adjacent Opportunities, managed by Sixth Street. The other commitment was $500 million to SLR 1818, managed by SLR Capital Partners.

Sixth Street and SLR Capital both have existing relationships with TRS Illinois. Sixth Street administers $20 million in TRS assets while SLR manages $153 million.

The $64.6 billion public pension currently allocates 23.7 percent to income. Its previous fund commitments have been heavily focused in the North America region.

Today’s letter was prepared by Andy Thomson with John BakieChristopher Faille and Robin Blumenthal