Loan Note: S&P notes rise in defaults, the real estate debt finance gap measured

S&P finds defaults on the rise. Plus: why the real estate debt financing gap is not out of control; and pensions continue to put their faith in alternative assets. Here's today's brief for our valued subscribers only.

They said it

“Ironically, the better the yield prospects for floating rate assets in a rising SOFR environment, the more tempting to wait for even better returns down the road”

Taken from the Lead Left, a weekly digest penned by Randy Schwimmer, senior managing director and co-head of senior lending at Churchill Asset Management

First look

S&P finds defaults on the up
Ratings agency S&P Global counted 21 rated corporate defaults in the second quarter of this year, accounting for $28.5 billion in outstanding debt. This compares with 13 defaults accounting for $8.6 billion in the first quarter, according to a new report (login required).

Despite defaults still being at a relatively low level, “market sentiment has soured in 2022”, according to Nick Kraemer, head of S&P Global Ratings Performance Analytics. He points out that global speculative-grade issuance is down 73 percent this year to $62.7 billion while spreads “widened dramatically” in the US and Europe in the second quarter.

The most affected sector was consumer services with five defaults, followed by leisure time/media and real estate with three defaults each. Credit quality remained positive, with more upgrades than downgrades, but the number of AAA ratings fell from eight to seven.

Few fears over real estate debt financing gap
A new study of the European real estate debt loan market by Hans Vrensen, head of research and strategy at AEW, examines the financing gap that needs to be bridged between the original debt amount due at loan maturity and the new debt available to repay it.

The report finds that across the UK, France and Germany, there could be a €24 billion debt funding gap over the next three years. However, compared with the global financial crisis, this gap is seen as “relatively modest” and likely to be bridged by a combination of equity top-ups, junior debt plugs, senior loan extensions and restructurings, loan write-downs and discounted loan sales.

“Refinancing issues will return to the forefront in the next three years as refinancing LTV ratios come down and margins move up,” says Vrensen. “However, European real estate investors and lenders are well positioned to absorb these issues, utilising mechanisms that proved effective post-GFC.”

Pension shift to alternatives gathers pace
A study of US state pension plans by advisory firm Cliffwater shows the increasing growth of alternative asset allocations, from 10 percent of total assets in 2006 to 21 percent in 2011 and 33 percent in 2021.

Over that period, most of the increase has come from a decline in public equities (from 61 percent of total assets in 2006 to 46 percent in 2020). However, last year alternatives gained mainly at the expense of a decrease in fixed-income allocations.

As return expectations for traditional asset classes have lowered, investors have become attracted to alternatives’ higher returns and lower volatility – in exchange for less liquidity, investment complexity and higher fees.

The report found private equity continues to be the best performing asset class, outperforming public equity by 4 percent per year over long time periods.


Dear LP: What’s on your mind?
Private Debt Investor’s research colleagues want to hear from all investors globally – on an anonymous basis – about their investment plans for our LP Perspectives Survey 2023. Now in its 11th year, the survey results will be published in a special report in December. Click here to take part. The deadline for submissions is 7 October.

Faughnan joins Star Mountain
US-based fund manager Star Mountain Capital, which focuses on the lower mid-market in North America, has appointed Stephen Faughnan as managing director of finance and operations.

Faughnan was previously managing director of operations at Siguler Guff & Company, the multi-strategy private equity, private credit and secondary investments firm. He was responsible for all daily operational functions of the firm and its related investment vehicles, including fund financing, operational due diligence, currency hedge trading, AIFMD implementation and reporting, information technology/cybersecurity, treasury, and human resources.

Faughnan also spent 12 years at Goldman Sachs Asset Management, where he was a vice-president and specialised in finance, operations and regulatory compliance in the New York, Bangalore, Seoul and Tokyo offices. He focused on management company reporting, fund accounting, portfolio valuations, fund operations and regulatory compliance.

Glenhawk gets NatWest backing
UK bridge lender Glenhawk has agreed a £200 million ($222 million; €227 million) senior funding line with NatWest Markets, as it aims to lend £1 billion annually by 2024. The new facility sits alongside an existing funding line with J.P. Morgan.

Having doubled its live loan book size over the past 12 months, the funding line will provide Glenhawk with the ability to significantly increase its lending volumes. It will support the expansion of its unregulated product range, which will have an increased focus on refurbishment and light development projects, larger loan sizes and commercial real estate, as well as an enhanced regulated offering.

LP watch

Institution: Connecticut Retirement Plans and Trust Funds
Headquarters: Hartford, US
AUM: $23 billion

Connecticut Retirement Plans and Trust Funds has announced a $100 million commitment to an emerging/diverse fund manager, according to documents from the pension’s September investment meeting.

The pension has allocated $100 million to The RockCreek Group, a Washington, DC-based fund manager with AUM of $16 billion. The firm will invest the pension’s $100 million across both private debt and emerging market opportunities.

The $100 million in commitments is part of the pension’s wider initiative to invest in more diverse and emerging managers. The programme, titled the Connecticut Inclusive Investment Initiative (Ci3), was launched in 2020 and led to an increase in the pension’s overall allocation to more minority managers, and will span across all asset classes.

The $23 billion US public pension’s recent private debt commitments have focused on vehicles with diversified sector focuses.

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